expected from an average one-year-old car on the road.
Consider his theory.
Any particular model year of car will include a certain
proportion of “lemons”—cars that have one or more serious
defects. Purchasers of new cars of a certain year and model
take a chance on their car turning out to be a lemon. Those
who are unlucky and get a lemon are more likely to resell their
car than those who are lucky and get a high-quality car. Hence,
in the used-car market, there will be a disproportionately large
number of lemons for sale. For example, maybe only 1 percent
of all 2019 Toyota Corollas have a significant defect and are
thus lemons. But in the market for used 2019 Toyota Corollas,
20 percent of them may be lemons.
Buyers of used cars are therefore right to be on the lookout for
lemons, while salespeople are quick to invent reasons for the
high quality of the cars they are selling. Because it is difficult to
identify a lemon or a badly treated used car before buying it,
the purchaser is prepared to buy a used car only at a price that
is low enough to offset the increased probability that it is a
lemon.
The market failure in this situation arises because of the
asymmetric information between the buyers and the sellers. If
there were perfect information, prices would better reflect the
quality of the used car. Good used cars would command higher
prices than used cars known to be lemons. Buyers and sellers