A problem that arises in markets where one party knows more about attributes of the good being sold than the other. Sellers of used goods, for example, know about their goods' defects, while buyers do not. eg. Tim would like to buy a used plasma television, but he is not an electronics expert and, thus, cannot assess the quality of a TV directly before owning it. Tim believes that owners of the worst TVs are more willing to sell their TVs than owners of the best TVs. Because of this, Tim believes that used TVs for sale are probably of low quality. Adverse SelectionDiverse SelectionNone of above

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Business

Hannah Simpson

19 February, 04:58

A problem that arises in markets where one party knows more about attributes of the good being sold than the other. Sellers of used goods, for example, know about their goods' defects, while buyers do not. eg. Tim would like to buy a used plasma television, but he is not an electronics expert and, thus, cannot assess the quality of a TV directly before owning it. Tim believes that owners of the worst TVs are more willing to sell their TVs than owners of the best TVs. Because of this, Tim believes that used TVs for sale are probably of low quality. Adverse SelectionDiverse SelectionNone of above

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Answers (2)

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Maddison Lynch · Answer 1

Answer: Adverse Selection.

Explanation:

The above situation described Adverse Selection because Adverse Selection refers to a situation where there is information asymmetry between buyers and sellers of a good or service. This means that a party involved has more information about the transaction than the other and this can lead to the person who has more information engaging in a transaction that is sure to benefit them at the expense of the person they are transacting with. A serious example is one of life insurance. Perhaps if a person knows that they will be dying soon but it won't show up on all medical scans and tests, they will get the life insurance and claim on it when they die. They had more information than the seller.

In the above scenario, Tim can make all the assumptions he wants to make but the fact is he simply will. not know what defects the television has because he is not the seller.

It is applaudible that he is approaching with caution though. He at least has a higher chance of success.

Andy Robertson · Answer 2

Adverse selection

Explanation:

Adverse selection is a situation where buyers and sellers have access to different information, so they make decisions to buy and sell in transactions that benefits them the most. Other participants suffer as a result.

Tim has less information than the seller of second hand televisions, therefore he may not be able to make an informed decision that will benefit him.

The seller on the other hand knows all the defects on his second hand televisions. So he can sell at a price that will benefit him.