economics hard MCQ

The 'Market for Lemons' theory, which won George Akerlof a Nobel Prize, illustrates the concept of:

  1. Moral Hazard
  2. Adverse Selection
  3. Principal-Agent Problem
  4. Tragedy of the Commons

Answer: Adverse Selection

Akerlof used the used-car market to show how asymmetric information (sellers knowing more than buyers) leads to adverse selection. Buyers, fearing they will get a 'lemon' (bad car), offer low prices, which drives sellers of good cars out of the market, potentially causing market collapse.

Topic Microeconomics - Information
Exam Relevance UPSC Prelims, SSC CGL
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