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Example
Used Car Market and Hidden Defects
A used car dealership offers both high-quality cars and 'lemons' (cars with hidden defects). The dealership knows the quality of each car, but buyers do not and are only willing to pay a price reflecting the average quality. This price is often too low for the dealership to profit from its high-quality cars, leading it to primarily stock and sell lemons. This scenario is a classic example of an adverse selection problem.
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Updated 2025-08-21
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