The Market For Lemons and The principle Of Market Failures

The Market For Lemons and The principle Of Market Failures You Should Know

A bold statement of a used car, and suddenly someone came to you in the street, we imagine: used car market for the sale of low-quality vehicle, "Do you agree with this statement?

Quality Uncertainty and George Akerlof, a professor of economics at the University of California, Berkeley, in 1970, the market mechanism, used in the automotive industry market failure and therefore the claim but were in "bad": After the seminar, the market for the right to use lemon may be present in the automotive industry, and in fact can be proven mathematically.



This paper was awarded the 2001 Nobel Peace Prize!

In this article, the term used by the call as George lemon vehicles (Lemon is actually an evil machine is used to represent an American slang term), and the term is used to determine the quality of the Peach cards.

Used cars sold in the automotive market, it sells well aware of the quality of the car; lemon or peach vehicles sold on the market to use the car, because the sellers know.

Unfortunately, it is not able to verify the quality of the cars purchased; Used vehicles, such as the quality of his knowledge is not complete. In other words, there is asymmetric information between buyers and sellers; Sellers know more about the quality of car buyers.

Knowledge and information related to the quality of the cars in terms of how the cars in the car price and the difference is important. The car is a very good peach lemon trader to accept a lower price of their crappy used car, the high price that want to sell their cars in very good sellers. SaleLet me an example of this dynamic buyer-seller.

Imagine if the buyer of a used car. If you know that Patrick wants to sell his peaches. Patrick knows who sells a peach, for a high price (say $ 20,000) for the sale of the car.

If the buyer is unable to determine whether this car is a peach, for you to buy a car, but you are not willing to take the risk of paying a high price of $ 20,000. Patrick lemon sales, the car will be ready for the allocation of $ 10,000. In this case, because Patrick is carried out to remove and store the car sells for $ 15,000.

The average price of the market will end up paying a $ 15,000 car buyers, and 50% of the cars sold in a peach and pool cars have been calculated assuming 50% based on the expected value of the cars sold in the lemon and peach and lemon In addition, the prices of all after an average price of $ 20,000 peach, lemon an average price of $ 10,000.

Peach-quality car owners, because, as used in the automotive industry, they are average, the rates are much lower than they are to justify the peach you know when to sell, and failed.

They are commanded to maintain the low quality but because the level is higher than what the average lemon owners will soon sell cars. The effective elimination of lemon, peach, sales of cars fell for the average quality of lemon, and market disruptions occurred in the used car market.

George Akerlof called the principle of dynamic Lemon.