information occurs if John who is buying Kim’s used Toyota Corolla
has the same amount of information as Kim.
Suppose that in a small town 40 used
cars are sold each month. Of the 40 cars sold, 30 are lemons and 10
are plums. If consumers expect 50% of the used cars sold to be
lemons, we can expect the price that buyers are willing to pay to
fall over time.
The result of adverse selection is
that the presence of high-quality goods in the market drive
low-quality goods out of the market.