Akerlof's model of asymmetric information

Akerlof’s model of asymmetric information explains how markets can fail when one party knows more than the other. For example, in the used car market, sellers know more about a car’s condition than buyers. This imbalance can lead to what's called "adverse selection," where buyers fear they might purchase low-quality cars and thus pay less or avoid buying altogether. As a result, good-quality cars may be driven out of the market, leaving only inferior ones. This model shows that unequal information can cause markets to break down or function inefficiently, highlighting the importance of transparency and trust.