George Akerloff focused the market for used cars and discussed an issue later generally called the "lemons problem." A "lemon" is a low quality used car, with the seller but not the potential buyer aware of this. Since sellers have more information about the quality of the car: moral hazard causes an inefficiently large number of transactions to occur. moral hazard causes an inefficiently small number of transactions to occur. adverse selection causes an inefficiently small number of transactions to Occur. adverse selection causes an inefficiently large number of transactions to occur.
In the year of 1970, a behavioral economist, George Akerloff published a paper "The Market for Lemons". He used the term lemon because Lemon means a term used to describe the "used and defective cars".
As per the George Akerloff seller has more information about the used cars as compared to the buyers. The lemon problem is associated with the amount or value of an investment because of asymmetric information available at both the ends. Seller and buyers both don't have the perfect knowledge of the product in the market in which seller is aware about the defective part of the product and buyer is having less information
The lemon problem theory is based on the "Quality Uncertainties and Market Mechanism". This theory states that the seller has more information of the vehicle than the buyer about the quality of the product this has an adverse impact as the buyer is in delimma that's why even the true value is more the buyer is ready to pay less.
This concept provides benefit to the seller if the car is of worst quality that is lemon and advantage the buyer if the quality of the product is good.
For example: if you are going to buy a car and you are not aware about the actual quality or true value of the product as per the quality then you will also keep the prices low by your end.
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