Lemon laws that allow consumers to return low-quality used cars are designed to help solve the problem of ________ in used car markets.
A) moral hazard
B) thick markets
C) experience ratings
D) adverse selection

Question

Quizplus · Accepted Answer

Lemon laws are designed to address the problem of adverse selection in used car markets - this is because buyers of used cars often have less information about the car than the seller, and sellers may try to sell low-quality cars to buyers who are unaware of the car's true condition. By allowing buyers to return cars that turn out to be "lemons" (i.e. defective or low-quality), lemon laws help address this problem by giving buyers more protection and reducing sellers' ability to take advantage of information asymmetries.

Lemon Laws That Allow Consumers to Return Low-Quality Used Cars