When asymmetric information problems drive high quality products from a market, we refer to this situation as:
A) adverse selection.
B) moral hazard.
C) a lemons problem.
D) A and C are correct.
E) B and C are correct.

Question

Quizplus · Accepted Answer

Adverse selection and the lemons problem both describe situations where asymmetric information leads to high-quality products being driven out of the market. Adverse selection refers to the process where bad-quality products or risks crowd out the good ones because the buyer cannot accurately assess quality before purchase. The lemons problem, a term popularized by economist George Akerlof, specifically addresses how the presence of inferior products (lemons) in the market can result in a decline in the overall quality of goods available, as sellers have more information about the product quality than buyers.

When Asymmetric Information Problems Drive High Quality Products from a Market