12.1 The Lemons Problem and its Solution

MyEconLab Concept Video

In all the markets that you’ve studied so far, buyers and sellers are well informed about the features and the value of the item being traded. Buyers know the bene­fits they get and sellers know the costs they incur. The buyers’ marginal benefit determines demand, the sellers’ marginal cost determines supply, and demand and supply together determine the equilibrium price and quantity. If none of the obstacles to efficiency described in Chapter 6 (see previous page) are present, then the market allocates resources efficiently.

In some markets, either the buyer or the seller has some relevant ­information to a transaction—private information—that the other lacks. One example of ...

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