The Market for Lemons

The Market for Lemons is an economic theory developed by George Akerlof, illustrating how information asymmetry can lead to market failure. It focuses on the used car market, where sellers know the condition of their cars, but buyers do not. Sellers may offer low-quality cars ("lemons") alongside good ones, leading buyers to assume all cars are of low quality. This distrust reduces the overall quality of the market, as buyers are unwilling to pay fair prices, causing good cars to be withdrawn from the market. Ultimately, this imbalance can harm both buyers and sellers.