Note: This is post #64 in a weekly video series on basic microeconomics.
Adverse selection occurs when an offer conveys negative information about what is being offered. For example, in the market for used cars, sellers have more information about the car’s quality than buyers. This leads to the death spiral of the market, and market failure, explains Marginal Revolution University. However, the market has developed solutions such as warrantees, guarantees, branding, and inspections to offset information asymmetry.
(If you find the pace of the videos too slow, I’d recommend watching them at 1.5 to 2 times the speed. You can adjust the speed at which the video plays by clicking on “Settings” (the gear symbol) and changing “Speed” from normal to 1.25, 1.5 or 2.)
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