[PDF] adverse selection used car example

The classic example of adverse selection is the lemon problem in the used car market: used car buyers can't tell the difference between a nice used car (a peach) or a crappy used car (a lemon), so they end up paying the average of the two while hoping for the best.
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  • What is an example of adverse selection of vehicles?

    Adverse Selection between Buyer and Seller
    For example, when a buyer is looking for a second-hand car to buy, and a seller offers to sell a car with hidden defects, the buyer will be at a disadvantage unless the seller informs the buyer about the defects.

  • What are some examples of adverse selection?

    An example of adverse selection in the provision of auto insurance is a situation in which the applicant obtains insurance coverage based on providing a residence address in an area with a very low crime rate when the applicant actually lives in an area with a very high crime rate.

  • What is an example of asymmetric information in a car?

    The sellers know the quality of their car but suppose that the buyers can't tell which used cars are lemons and which are plums. Since the sellers have more information than the buyers, this is a model of asymmetric information.
  • Lemons Problem - This is when the low quality products drive out the high quality products until only lemons (low quality products) are left in the market. Example: The market for used cars.
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