Lemons

An example used by George Akerlof, an American economist (and winner of a Nobel prize) to explain why markets might not operate efficiently because of adverse selection. There is information asymmetry in the used-car market, he pointed out, as sellers know a lot more about the condition of the vehicle than buyers. Buyers will be suspicious of purchasing a dud car, or lemon, and will thus reduce the price they are willing to pay. If sellers are unwilling to agree, there may be no deal at all. For more detail, read our Schools Brief.