The Market for Lemons Essay

598 Words Nov 14th, 2012 3 Pages
I & II Introduction and Article Summary
The Market for “Lemons”: Quality Uncertainty and the Market Mechanism by George A. Akerlof was published by the Oxford University Press in The Quarterly Journal of Economics in 1970. It discusses information asymmetry, which occurs when the seller knows more about a product than the buyer. Akerlof explains the problem of quality uncertainty with an example of the market for used cars. A used car is a car that has had one or more registered owners and has inevitable wear and tear. There are good used cars and bad used cars (lemons). A lemon is an American term for a car that is found to be defective only after it is bought. Used cars that are defective are called lemons, and most defects are
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The buyer, however, knows this, so they take the quality of goods with a grain of salt. So, only the average quality of the goods will be considered, which means the goods above the average will be driven out of the market, which will repeat until the market no longer remains.
IV Response to Question 2 The lemons problem results from asymmetric information in which buyers aren’t privileged to the same information that sellers are. In order to remedy this, trust has to be created between the buyer and the seller. Akerlof gives several examples in the article, one being guarantees. The buyer is expecting a normal quality, and the seller has to guarantee that the buyer is going to get it. It costs a lot more to guarantee a lemon than a good product. A second example is brand-names. Brand names not only indicate quality but also give the consumer a means of retaliation if the quality does not meet expectations, for the consumer will then curtail future purchases (p. 500). V Conclusion By creating guarantees and trust in brand-name products, the market can exist due to buyers and sellers finding a balance. Trust is important whenever there is a situation where asymmetric information is present. Without it, markets would not exist in the world due to not being able to tell a good product from a

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