Interests Rates Coursework Example | Topics and Well Written Essays - 500 words

Interests Rates - Coursework Example Akerlof’s experience during his writings on Lemons problem and its effect on the proficient functioning of a market is best summarized by stating that markets are characterized by asymmetric information, and thus there is a need for adjusting the markets interests rates for individual market participants, which necessitates the better-informed participants to take costly actions in an effort to develop market outcome by transmitting credible information to the poorly informed. According to Akerlof, most sellers are likely to lower the quality of a product in situations where the buyer cannot exactly determine or observe the product quality. He adds prices are likely to decline because of the unwillingness of the buyers to pay because of skimped quality. This leads a much lower quality because sellers maximize every opportunity to make more prices at the lower prices offered by buyers. This leads to market failure because sellers would sell a high-quality product at high prices despite the fact that buyers are willing to pay for the high prices.Akerlof uses examples of second-hand cars to enhance his theory of market equilibrium. The categories the cars into two; Lemons and Plums. The lemon represents a bad car, a car that is of poor quality and buyers should avoid buying lemons in the market according to Akerlof. He uses plum to mean a good quality car and most buyers would prefer to buy a plum. This situation occurs because people will not easily verify the quality of a product.