Adverse selection can drive good used cars from the market because:
A) sellers have no way of convincing buyers that they have good information.
B) sellers are unable to distinguish good used cars from bad used cars.
C) buyers reduce their willingness to pay for used cars because they are wary of bad cars.
D) buyers decide to purchase only bad cars.

Question

Quizplus · Accepted Answer

Adverse selection refers to the situation where buyers are uncertain about the quality of the product that they are buying. In the case of the used car market, this means that buyers have a hard time distinguishing between good and bad cars. As a result, they become wary of buying any used car, and this reduces their willingness to pay for them. Since the demand for good used cars goes down, sellers may find it unprofitable to sell them, and this can drive them out of the market.

Adverse Selection Can Drive Good Used Cars from the Market