The following text discusses economics.
Information asymmetry occurs when one party in a transaction has more information than the other. This concept, explored by economists George Akerlof, Michael Spence, and Joseph Stiglitz, helps explain market failures. In Akerlof's famous "market for lemons" example, used car sellers know more about vehicle quality than buyers. Because buyers cannot distinguish good cars from bad, they assume the worst and offer low prices—driving honest sellers out and leaving mainly "lemons." This dynamic can cause markets to collapse even when mutually beneficial trades would otherwise occur.
What problem does information asymmetry cause in markets?
It ensures only high-quality products are sold
It can drive good products from the market, causing market failure
It benefits all parties equally
It has no effect on pricing
Correct Answer: B
Choice B is the correct answer. The text describes how asymmetry drives "honest sellers out and leaving mainly 'lemons'" and "can cause markets to collapse."
- Evidence: Good sellers leave; markets collapse.
- Reasoning: Uncertainty leads to adverse selection.
- Conclusion: Market failure from good products disappearing.
Choice A is incorrect because the opposite occurs—good products are driven out. Choice C is incorrect because it creates market failures. Choice D is incorrect because "low prices" result from buyer uncertainty.