The Lemon Theory
The source I chose to use while describing and discussing the lemon theroy is written by none other than the founder George A. Akerlof himself. He talks about how he intially started in the field of econonics and how it was progessing at a rapid speed. It was based solely of the complete equilibium and then expanded to many theroies that are shared today. What I found interesting is that he seeked out researchering used car markets because he personally was shocked at the amount of new cars purchased each year. He couldn’t believe all these people were buying new cars rather than rented or lightly used autos. That is when he first started witnessing the complete downfall and collpase of the used car market. He sent many years seacher for main reason begind these callopses and each time it was due to “lemons” driving the good car out of the market but forceing the buyers average value down.
After working through some problems focusing on the used car market, which include many different types of cars. Some of which were in very good condition and still others were in decent shape and then still other were classified as lemons meaning they were seemingly useless. This last type of car “lemons” are what I wish to discuss today, and how they can change the used car market from functioning properly to not at all in an instant. The lemon theory is pretty understandable, it is referring to the used car market. For the market to run smoothly and for all car to be sold, the buyers average value must be greater than the seller’s value for their good used car. This will allow one around price for cars to be purchased, but what lemons do to the market is lower the buyer’s average value. This is because “lemons” offer no value to the buyer, thus driving the Buyer’s value below the seller’s value for his good used car. Once the seller’s value is greater than the buyers value, he or she will not be willing to sell. With the highest value cars now off the market, this only encourages the buyer’s average value to decrease because he or she knows that there are only decent used cars and lemons left, therefore it’s risky. Soon enough the buyer’s value will be zero because only lemons are still left on the market, I find it fascinating that all of this cascaded from the dead weight lemons put on the used car markets.
http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2001/akerlof-article.html