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Explain the proposition that asymmetric information can lead to complete market unravelling.
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Microeconomics Essay: Explain the proposition that asymmetric information can lead to complete market unravelling. Asymmetry of information is said to occur when, in economic activities, some agents are better informed than others. For example, sellers of a particular product will know more about it's quality than potential buyers, especially in the case of second hand goods. The existence of asymmetric information has important implications for the functioning of markets. George Akerlof's paper, 'The Market for Lemons,' argued that asymmetric information actually leads to market unravelling, an extreme form of market failure, where goods fail to be bought and sold at all. To explain Akerlof's argument, I will examine the market for used cars. There is often great surprise concerning the large price difference between new cars and those which have just left the showroom. Usually the explanation for this price difference is the feel-good factor of owning a new car. Akerlof offers a...
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