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Lemons sell out in Cuba

A recent article on the New York Times explores Cuba’s reintroduction to the used car market. This fall the Cuban government eased restrictions on cars allowing citizens to buy and sell used cars produced after 1959. In class we learned how in a market with asymmetric information and equal numbers of good, bad, and horrible cars the market will eventually fail as the expected value of a car will keep falling below selling price.

 

In Cuba, a market consisting almost exclusively of lemons and mediocre cars, people are fighting hand over fist to pick up any car on the market. There is tremendous demand for any car on the market as no one has been able to buy a car, new or used, in over half a century. A 30-year-old Moskvich, a veritable lemon in United States, will bring in at least $5,500. One man put it: “A car that in another country you’d pay to destroy, you can sell here for $14,000”. The demand just to have a car has pushed the price of cars well above any equilibrium price based on actual value. Unlike in chapter 17, Cubans cannot continue to go out and buy cars are there are still strict regulations on buying new cars, which means that the pool of used cars will not change and the demand will not go away. Either the price will stabilize at a value limited by how much money people have or the novelty of the ability to buy a car will wear off bringing prices back down to a better representation of the product. It will be really interesting to see how Cubans react if the government continues to open up other markets and industries re-enter their market. Cubans could easily be exploited by industry, as the shear novelty factor will push prices well above reasonable values creating huge but fragile bubbles.

 

http://www.nytimes.com/2011/11/06/world/americas/relenting-on-car-sales-cuba-turns-notorious-clunkers-into-gold.html?pagewanted=1&_r=1&sq=used%20cars&st=cse&scp=3

 

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