<P> "The Market for Lemons: Quality Uncertainty and the Market Mechanism" is a 1970 paper, by the economist George Akerlof which examines how the quality of goods traded in a market can degrade in the presence of information asymmetry between buyers and sellers, leaving only "lemons" behind . In American slang, a lemon is a car that is found to be defective only after it has been bought . </P> <P> Suppose buyers cannot distinguish between a high - quality car (a "peach") and a "lemon". Then they are only willing to pay a fixed price for a car that averages the value of a "peach" and "lemon" together (p). But sellers know whether they hold a peach or a lemon . Given the fixed price at which buyers will buy, sellers will sell only when they hold "lemons" (since p <p) and they will leave the market when they hold "peaches" (since p> p). Eventually, as enough sellers of "peaches" leave the market, the average willingness - to - pay of buyers will decrease (since the average quality of cars on the market decreased), leading to even more sellers of high - quality cars to leave the market through a positive feedback loop . </P>

The market for lemons quality uncertainty and the market mechanism pdf