Define Asymmetric Information:
Availability of relevant information is crucial for the function of the markets more efficiently. But in some credence goods and in certain industries, sometimes, consumers may not able to get available information to evaluate the goods and services they want to purchases. And this can lead the possibility of lemons problem/lemons problem. The Market for Lemons:” Quality Uncertainty and the Market Mechanism” is a famous paper by great economist George Akerlof, which examines in the presence of asymmetric information, how a number of goods can degrade between the buyers and sellers in the market, only leaving behind “ lemons”. The term “lemon” is an American Slang term use for a car that is found to be defective after it has been bought by the buyers. The market for used cars has taken as an example of the problem of quality uncertainty in Akerlof’s paper. This paper shows how the prices of the goods traded on the market is determined. In this paper, it has shown in the presence of asymmetric information, how low prices drive away all sellers with high-quality goods by leaving only lemons behind (Ross, 2013).
Information Asymmetry Economics:
Information asymmetry is inherent in most of the markets. In economics, asymmetric information/asymmetric information economics mainly deals with the study of the decisions in case of transactions in which, between two parties in the market i.e. buyers and sellers, one party has better information than the other party. This information gap creates an imbalance in market transactions in terms of power, as a result market mechanism may not work properly, and this creates ultimately market fail in the economy. In 1970, George Akerlof published a paper on “The Market of Lemons: Quantity Uncertainty and the Market Mechanism” in which he examines and explains how can degrade the amount of goods exchange in the market because of the presence of asymmetric information between buyers and sellers in the market, leaving behind only ‘lemons’. The paper of Akerlof uses the market for those cars which have been used as a good example of the problem of uncertainty. In this paper, Akerlof concluded that owners of the new cars or good cars will not go to sell their cars in the used car market. It is generally called that the bad things driving out the good things in the market (Akerlof, 1970).
This paper describes how the interaction of the asymmetric information and quality heterogeneity can lead to the disappearance of a market. In this case, due to asymmetric information, the seller gets incentive by passing off low-quality goods as high-quality goods and taking good quality goods becomes uncertainty for the buyer. The average quality of goods only will be considered in this case, which, on the other hand, has also a side effect that the goods that have the quality above the average level of quality will be derived out from the market. And this process continues until reaching non-trade equilibrium in the market (Ross, 2013).
Asymmetric Information is a situation in which one party, in the case of a transaction, has superior or more information compared to another party. It generally occurs in transactions where the seller knows more about the product than the buyer, although the reverse situation can happen also. Actually, Asymmetric Information could be very harmful situation because one party can get an illegal advantage by the lack of knowledge of another party (ROSEN 2010).
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Yale University, Economics.