The Market for Lemons

Imagine you’re buying a used car. The seller knows whether it’s a reliable machine or a mechanical disaster. You don’t.

That information gap changes everything.

This idea comes from George A. Akerlof in his famous paper “The Market for Lemons.” A “lemon” is a defective car. If buyers can’t tell good cars from bad ones, they’ll only be willing to pay an average price.

Here’s the trap.

Suppose good cars are worth $10,000 and bad cars $5,000. Buyers, unsure which is which, might offer $7,500. Owners of good cars think, “No way. Mine is worth more.” They exit the market. Now mostly bad cars remain. Buyers realize this and lower their offer further. Eventually, only lemons are left.

The market collapses — not because people are foolish — but because information is uneven.

Economists call this information asymmetry. One side knows more than the other. And when that gap becomes large enough, markets unravel.

You see this everywhere:

• Health insurance (you know more about your health than the insurer).
  
• Online marketplaces (is that seller legit?).
  
• Hiring (is the candidate actually skilled?).
  

This is why we have warranties, certifications, brand reputation, reviews, and regulation. They’re not just bureaucracy — they’re trust-building mechanisms that keep markets alive.

Interestingly, Akerlof shared the Nobel Prize with economists who showed that real-world markets are fragile systems built on information flows. If those flows distort, incentives distort.

Markets aren’t magic. They are coordination systems built on trust, incentives, and signals. When signals break, prices stop telling the truth.

And that’s the deeper lesson across both days: economics isn’t about money. It’s about hidden structures shaping behavior. Sometimes progress makes things expensive. Sometimes rationality makes systems fragile.

The world runs on incentives and information — and both are far stranger than they look.