Question

Hi,

When we talk about 'lemons problem', is lemon the good cars or it is citrus that is the good one?

Thanks in advance!

Answer 1

The lemons problem illustrates the problem of asymmetric information i.e buyers and sellers dont have equal amounts of information required in order to make an informed decision about any transaction. The seller usully knows the true value of the good or servive while the buyer doesnt usually have that kind of information. In this problem lemon is the bad car while citrus is the good one. When buying lemons which are of lower quality, buyers prefer giving the average price which is still greater than the actual value which is thus a premium and an advantage for the seller. The same thing is a disadvantage for sellers of citrus which are good quality cars. This is because since buyer sdont know about the good quality, they would still be paying the average price, but in this case average price is lesser then the actual value leading to a discount for the seller.