Market For Lemons Summary

Therefore, the probability of a car being good can have a probability of q while the probability of a lemon would be (I-q). This probability increases, however, as time progresses and you learn about your car. Therefore, it can be seen that the seller will have a more accurate prediction on the quality of the car as opposed to the buyer because the seller has more information on the car. The problem is that the seller is forced to sell his car at a price which disregards quality because buyers are enable to tell the difference between a good car and a lemon.

Therefore, the seller is not able to receive the true value of his car and therefore forced to operate under a loss. Croaker continues this analogy In other examples. In the Insurance Industry, the elderly have problems obtaining Insurance due to the drastic spike In premium cost. Research has shown that as the price level rises, the people who insure themselves will be those who are increasingly certain that they will need insurance.

This means that as the average medical condition of the uninsured deteriorates, the price level rises, with the result that no insurance sales may take place

at any price. Croaker also uses the example of employing minorities, the cost of dishonesty, and the credit markets in underdeveloped countries to make his point. He has shown how “trust” is extremely important in any business transaction. Informal guarantees are preconditions for trade and business.