15 – THE MARKET FOR “LEMONS”: QUALITY UNCERTAINTY AND THE MARKET MECHANISM*

Publisher Summary This chapter presents a relationship between quality and uncertainty. The existence of goods of many grades poses interesting and important problems for the theory of markets. There are many markets in which buyers use some market statistic to judge the quality of prospective purchases. It is perceived that in these markets, social and private returns differ, and therefore, in some cases, governmental intervention may increase the welfare of all parties. The automobile market is used as a finger exercise to illustrate and develop these thoughts. This market is chosen for its concreteness and ease in understanding rather than for its importance or realism.