what is a lemon 
the theory of lemons was put forward in a 1970 research paper in the quarterly journal of economics titled the market for lemons quality uncertainty and the market mechanism written by george a akerlof an economist and professor at the university of california berkeley 1 a lemon problem arises regarding the value of an investment or product due to asymmetric information possessed by the buyer and the seller asymmetry of informationnobel prize recipient george akerlof examined the used car market and illustrated how the asymmetry of information between the seller and buyer could cause the market to collapse getting rid of any opportunity for profitable exchange and leaving behind only lemons or poor products with low durability that the buyer purchased without sufficient information 1asymmetrical information means that buyers and sellers don t possess equal information required to make an informed decision regarding a transaction the seller or holder of a product or service usually knows its value or at least knows whether it is above or below average in quality potential buyers however typically lack this knowledge and can only rely on the seller s information used car exampleakerlof s example of the purchase of a used car noted that the potential buyer of a used car cannot ascertain the value of the vehicle therefore they may be willing to pay no more than an average price which they perceive as between a bargain price and a premium price 1adopting such a stance may offer the buyer financial protection from the risk of buying a lemon akerlof pointed out however that this stance favors the seller since receiving an average price for a lemon would still be more than the seller could get if the buyer knew 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 they are unwilling to offer a premium price for a vehicle of superior value the u s lemon law that sets regulations for consumer products covered by written warranties is found in title 15 chapter 50 of the u s code in sections 2301 2312 also known as the magnuson moss warranty federal trade commission improvements act 2protection from lemonsthe lemons problem exists in the marketplace for consumer and business products and investing related to the disparity in the perceived value of investments between buyers and sellers the lemons problem is also prevalent in the financial sector such as the insurance and credit markets for corporate finance a lender has asymmetrical and less than ideal information regarding the actual creditworthiness of a borrower akerlof proposed strong warranties to thwart the lemons problem as they can protect a buyer from any consequences of buying a lemon another solution akerlof did not know when he wrote the paper in 1970 is the explosion of readily available information disseminated through the internet information services such as carfax help buyers feel more confident by providing a vehicle s history 3