Asymmetric information

Asymmetric information means one side of a deal knows more than the other, and it can break markets that would otherwise work well. In a used-car market, sellers know whether their car is good or a 'lemon', but buyers cannot tell, so buyers offer an average price. At that price, owners of good cars refuse to sell and only lemons remain — the market shrinks or collapses. Worked example: if half the cars are good (worth 1000) and half are lemons (worth 400), buyers will pay at most the expected value, 700. Owners of good cars worth 1000 will not sell at 700, so only lemons trade.