Question

An apartment owner advertises for lawn mowing services for a number of apartments he owns. He has some idea of the going price and so he advertises that he will pay $100 per month per apartment complex. So why is he disappointed that the winning contractor only provides minimal services? Key word for the answer is adverse selection. Please axplain detailed your answer

Answer 1

Adverse selection is the situation where one party has more or better information regarding a transaction than the other, leading the transaction to occur on uneven terms. As given in the example above, the buyer has some idea/information regarding the on going price for the lawn mowing services which means that the seller has access to better information. The $100 per month per apartment complex is the price offered by the buyer who has little or no knowledge of the range of services being provided within that price. The expectation of the buyer would be to have maximum services availability within the budgeted price, however, that might not be the case. Hence, the buyer is disappointed with the minimal services provided by the winning contractor.