Question

Explain why the used car market is both an adverse selection and an asymmetric information problem.

Answer 1

Used car market is both an adverse selection and an asymmetric information problem because adverse selection occurs due to asymmetric information between a buyer and seller before they close a deal.

In the used car market seller generally hides or he himself don't have proper information about previous ownership of car, like how many miles does car has been drove, whether car used to get proper maintenance services or not. and when buyer buys used car based on these asymmetric information it leads to the problem of adverse selection.