The Market of Lemons

The Market of Lemons is about how the quality of goods traded in a market can degrade in the presence of information asymmetry between buyers and sellers, leaving only “lemons” behind. In American slang, a lemon is a car that is found to be defective only after it has been bought.

1. For example, in a used car market, all the sellers have information about their cars, but the buyers do not. So the buyers would take the only available information, price, and select the asking price to limit what type of cars they buy. Sellers with higher than the asking price to leave the market, making the future buyers with a lower asking price, and so on. It results that sellers can’t sell their used cars and buyers can’t buy them.
2. In economics, Gresham’s law is a monetary principle stating that “bad money drives out good”. People are more likely to hand out the debased coins while keeping the good ones to themselves.
3. Weddings are expensive because of information asymmetry. People know the prices for fruits but they don’t know the price of weddings. Unlike used cars, weddings are on a bigger scale (once in a lifetime mentality) and it is difficult to get the quote from the vendors.