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Money & WorkMental model

Why good used cars quietly leave the market.

George Akerlof showed in 1970 that when only the seller knows the quality, buyers pay just an average price. For good goods that is too little, so they withdraw – and the average sinks further. This adverse selection can dry a market out entirely.

Useful: The remedy is signalling: warranties, inspection reports, certificates. They cost money, which is exactly why they work.

Source: de.wikipedia.org

InformationMarktVersicherung

Difficulty:

Question on this card

Why do good offers disappear under adverse selection?

  1. They cost too much to produce
  2. Buyers cannot see quality and pay only an average price
  3. The state bans them
  4. Demand falls
Show the answer

Correct: Buyers cannot see quality and pay only an average price

With asymmetric information, a good offer is not worth selling at the average price.

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