Have you ever gone and bought something and then found out that it was most definitely not what you thought it was? Normally the lemon example is with cars, so we’ll run with that for the scenario. You go to the dealership to buy a used car. It looks nice on the outside, the seats are pretty comfortable, and the price is pretty acceptable. The dealer tells you the mileage isn’t very high either, so it seems like this is going to turn out really well for you! Then you take the car home and find out it’s got like 50,000 miles more on it than you thought, all the engine check and maintenance lights start lighting up by week two and you’re pretty sure the tire pressure is off. Your friend might tell you you bought a lemon. But… Why a lemon? Why do we call bad products lemons–and why do we normally use cars as the example?
Why Cars Are the Example
Simple answer: this is a common scenario presented in introductory economics classes coined by a guy named George Akerlof. It comes from a paper he wrote called “The Market for Lemons: Quality and Uncertainty and the Market Mechanism,” in which Akerlof explains the hypothetical “market for lemons” using used cars.
That’s really it. That’s why we call bad cars lemons. Next question.
What Actually Makes Them Lemons?
Akerlof’s market for lemons explains a simple phenomenon. Comparatively lightly-used cars sell really below the brand-new price. You know this intuitively, if you’re going to sell something you can’t charge anywhere near as much if you open the box. Even if you never actually used what’s in the box. It could be functionally brand-new by virtue of being unused, but that pitch is a hard sell if the packaging has been opened at all. Vice versa, you probably wouldn’t buy something at full price if it were already opened–even if you were told it was unused. Might as well just buy a new one.
What the market for lemons gives us is a more technical reason for what we all understand pretty intuitively. It’s an issue of information, or rather the lack thereof (if you were to take an into-econ class, you’d know this as information asymmetry). When it comes to buying/selling things, the buyer and seller often know different things. When you buy a car the dealership knows more about the car you want to buy than you do. They know how many miles are on it, they know if the brakes are in working order, they might even know whether or not the previous owner ate like 14 sloppy joes and spilled them all over the dash.
The thing is, without doing investigative work you don’t know those things, and have to go find out. It’s because of this that the buyer cannot tell the difference between a high-quality used car and one that’s basically garbage–referred to as a lemon.
What Does this Mean for You?
At the end of the day what this ends up doing is devaluing something if the buyer doesn’t know enough about it. How can you trust the seller that the car has low mileage on it if they can just lie to you? So you just assume the worst-case scenario, and the price you’re willing to buy the car at is lowered because you factor that in.
Even if the car is priced fairly, without a way to verify that yourself, you’re probably only going to be willing to buy it if the price were lower. Assuming a good chunk of people think like you do, that means used cars (and used products generally) aren’t getting bought because people assume their quality is a lot worse than they really might be. This is an economist’s nightmare; it means trades that would happen had everyone equal access to information aren’t otherwise happening.
Anyway, that’s why we have lots of shortcuts to accessing information. Products have seals you have to peel off when you buy them. We have organizations like the Bureau of Consumer Protection that (try) to keep sellers from swindling you by requiring them to provide certain pieces of information to you, or by penalizing them for lying.
See if you know which car manufacturer logos are lemons or not here.