Lemon Laws Market Efficiency
of products and services exchanged in markets. This phenomenon, at times called
the “lemons problem,” explains why the supply of lower-quality
products increases relative to higher quality products when sellers cannot
communicate the quality of their products to potential buyers.
a. Why efficiency in markets with incomplete information
present lower than in those with perfect information.
b. How “lemon laws” that allow buyers to return
used cars or other products that turn out to be “lemons” help to
correct the problem.
c. How certifications and warranties can reduce
inefficiencies.
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