Consider the following story: Jonas would like to buy a used banjo, but he is no

Question

Consider the following story: Jonas would like to buy a used banjo, but he is not an expert on instruments and, thus, cannot assess the quality of the banjo directly without playing it for an extended period. Jonas believes that owners who have not taken proper care of their banjos are more willing to sell than owners who have maintained their banjos well. Because of this, Jonas believes that banjos up for sale are probably of low quality. Which of the following economic problems Is characterized in the story? Moral hazard Government failure Adverse selection The free-rider problem

Explanation / Answer

THIS IS CASE OF ADVERSE SELECTION WHERE THERE IS A LACK OF SYMMETRIC INFORMATION PRIOR TO DEAL BETWEEN BUYER AND SELLER. OVER HERE ONE PARTY HAS MORE ACCURATE AND DIFFERENT INFORMATION FROM THE OTHER PARTY. JONAS OVER HERE HAS LESS INFORMATION THEN SELLERS.

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