There is an adverse selection problem in the market for used cars because:
A) Owners of poor-quality cars have a strong incentive to sell their cars, while owners of high-quality used cars have more incentive to keep their cars
B) Owners of high-quality cars will have a strong incentive to sell their cars to obtain the higher prices, while owners of poor-quality cars will have more incentive to keep theirs
C) Most people prefer new cars, but the high prices for new cars force most of them to buy used cars
D) Government actions to pass "lemon" laws have reduced information on used cars

Question

Quizplus · Accepted Answer

Adverse selection occurs when one party in a transaction has more information than the other party. In the market for used cars, owners of poor-quality cars who know their cars are of low quality will have a strong incentive to sell their cars while owners of high-quality used cars who know their cars are of high quality will have more incentive to keep them. This results in a higher proportion of low-quality used cars on the market.

There Is an Adverse Selection Problem in the Market for Used