In the market for used cars, car owners have abundant personal experience with the important characteristics of the vehicle that they are selling. However, a prospective buyer can only guess the characteristics based on each car's appearance. Which of the following problems arises due to this information mismatch?

Question

In the market for used cars, car owners have abundant personal experience with the important characteristics of the vehicle that they are selling. However, a prospective buyer can only guess the characteristics based on each car's appearance. Which of the following problems arises due to this information mismatch?​

Quizplus · Accepted Answer

The problem of adverse selection arises in the market for used cars due to the information mismatch between the seller and the buyer. The seller has abundant personal experience with the important characteristics of the vehicle, while the buyer can only guess the characteristics based on each car's appearance. This leads to a situation where the sellers who know that their cars have problems, defects or other issues are more likely to sell them in the market for used cars, leaving the buyers with a high probability of getting a poor quality car.

In the Market for Used Cars, Car Owners Have Abundant