Question

For an assignment I need to write a 5 page essay about any topic. I need some some thinking of a topic and outlining of the topic.

Answer 1

LEMON PROBLEM

Once upon a time there was a market for used cars and two types of car dealers, one were honest who sold goods used cars and others were cheaters who sold bad used cars(lemon) but the customer had no way to distinguish between a good car and and lemon(bad car).

Now suppose lemon should be of $30000 and good car was of $80000 but the problem was customer was not aware about quality of cars so he was confused regarding how much he pay, so he finally decided that he will pay average price $50000

As an effect only lemon cars were being sold as honest dealers were not able to make deal as they were making loss and on the other side lemon dealers were making profit as an effect all honest dealers were pushed out of market and the market were left with lemons which finally destroyed the entire market for used cars.

In simple terms the lemons problem refers to issues that arise due to asymmetric information possessed by the buyer and the seller of an investment or product, regarding its value.

The lemons problem was put forward in a 1970 research paper, "The Market for Lemons," written by George Akerlof, an economist and professor at the University of California, Berkeley. The tag phrase identifying the problem came from the original example of used cars that Akerlof used to illustrate the concept of asymmetric information, as defective used cars are commonly referred to as "lemons."!--break--The lemons problem is recognized as existing in the marketplace for both consumer and business products, and also in the arena of investing, related to the disparity in the perceived value of an investment between buyers and sellers.

Causes and Effects

The Problem of lemons arises because buyers and sellers information were not at the same level as buyer was not aware about the correct price, true quality etc regarding the product by this seller was taking advantage by compromising quality .

Adopting such a stance may at first appear to offer the buyer some degree of financial protection from the risk of buying a lemon. Akerlof pointed out, however, that this stance of the buyer actually favors the seller, since receiving an average price for a lemon would still be more than the seller could get if the buyer had the knowledge that the car was a lemon. Ironically, the lemons problem creates a disadvantage for the seller of a premium vehicle, since the potential buyer's asymmetric information, and the resulting fear of getting stuck with a lemon, means that he is not willing to offer a premium price even though the vehicle is of superior value.

Possible Solutions

Hiring an external expert
By hiring external expert will help customer to know all types of information regarding the product specially regarding quality.

Certification of Goods and services
Honest dealers can certify goods and services from a certified group or institution by this customer will never be confused between "Good" and "Lemon".

Warranties, guarantees and refunds
These services should be given to every customer as accidental damage or damaged product, if these types of situation comes then customer can freely change or return goods to the seller.

Consumer Protection Regulation

Government should focus on this by implementing consumer protection laws designed to set a standard by which all firms must legally comply.

Practical example of Lemon problem in service sector can be, In the hospital case, the doctor has an incentive to diagnose accurately and prescribe treatments correctly but instead doctors perform wrong activities by fooling patients and not disclosing the information regarding the disease and treatment just to earn money.

Lemon Problem is also known as problem of Asymmetric Information