Live revision! Join us for our free exam revision livestreams Watch now

Topics

Lemons Problem

The "lemons problem" describes a market failure that can occur when there is asymmetric information, or a situation where one party has more information about a product or service than the other party. The term was coined by economist George Akerlof in his paper "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism."

"Lemons" refer to goods of poor quality that are mixed in with goods of high quality in a market. When buyers do not have enough information to distinguish between the high-quality and low-quality goods, they may be unwilling to pay a fair price for any of the goods, leading to a market failure. This can occur, for example, when used cars are sold without disclosing their full history or when a consumer is unable to easily compare the quality of different products.

The lemons problem can lead to a lack of trust between buyers and sellers and can result in a decrease in the overall quantity and quality of goods available in the market. It can also lead to higher prices for goods, as sellers may need to compensate for the increased risk of selling low-quality products.

See also

© 2002-2024 Tutor2u Limited. Company Reg no: 04489574. VAT reg no 816865400.