would then conduct more transactions, for two reasons. First,
owners wanting to sell good used cars would be more likely to
sell them since they know they will get a good price. In
contrast, when information is poor, owners of good used cars
are less inclined to sell their cars because the prices of used
cars reflect the average quality, which of course is diminished
by the presence of the lemons. Second, when information is
good, consumers know precisely what it is they are buying.
Consumers who want to spend more on a good used car can
do so; other consumers who want the bargain price on a car
known to be a lemon can also be satisfied. A larger number of
successful transactions between buyers and sellers means
more surplus on both sides of the market—that is, a more
efficient outcome.
The now-standard five-year bumper-to-bumper warranties on
new cars helps to improve the efficiency of the used-car
market. With such warranties, buyers are prepared to pay a
higher price for a used car as long as there is still some time
remaining on the warranty. Yet even when repairs are covered
under warranty, the significant time and inconvenience costs
associated with getting a car serviced mean that the
unavoidable asymmetric information in the used-car market
still leads to inefficient outcomes.