The Market for Lemons
Interesting, but there seem to be a lot of assumptions baked into the default &quot;used car market&quot; example, that don&#x27;t necessarily hold up. For example, the idea that the owner knows whether they hold a &quot;peach&quot; or a &quot;lemon&quot;.  Clearly he&#x2F;she has <i>some</i> idea, but they definitely do not have perfect knowledge of this.  In fact, this very lack of knowledge (&quot;how many more miles will I get out of this car before the transmission falls out?&quot;) may be the reason the owner has chosen to manage risk by buying a newer car.  But the actual answer to that question could be anywhere from &quot;1 more mile&quot; to &quot;another 250,000+ miles&quot;.<p>Likewise, this statement:<p><i>Given the fixed price at which buyers will buy, sellers will sell only when they hold &quot;lemons&quot; (since plemon &lt; pavg) and they will leave the market when they hold &quot;peaches&quot;</i><p>is iffy. As the owner of a used car, I may choose to buy a newer car for any number of reasons, including just wanting something to impress my peers, or impress members of the opposite sex, whatever. Say I buy a nice, sexy, new sports-car. I don&#x27;t need my old car anymore, regardless of whether it is a peach or a lemon. But my decision to sell it may not involve its status as &quot;peach&quot; or &quot;lemon&quot;. It may simply be that I don&#x27;t want to pay property taxes and registration fees on a car I&#x27;m not using. Maybe I just don&#x27;t have anywhere to park a second car. Or maybe I&#x27;m just feeling generous and want to help somebody else out by selling them my no-longer-needed car.<p>All of that said, I&#x27;m sure the math is valid and this theory has uses... but this used car thing feels a little dodgy.