Lemon Laws Market Efficiency
Incomplete information frequently lowers the average quality 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. Discuss:
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.
...nufacturing and these in turn realize lower prices in the market.
Lemon laws that allow buyers to return used cars or other products that turn out to be lemons help correct the problem in two ways. First, it gives the customer confidence that if the car or other product is not up to the mark he can return it. Second, it encourages manufacturers to produce defect free and high quality cars and products so that the customer does not return the car or product. The return of used cars or even car recalls can be very costly and ...