Greetings, we're into thinking about market failure and in particular, we're into thinking about market failure that comes from information problems. And as we said before we're talking about situations where markets look like they should be fine to work but because of information problems, something doesn't work right, okay? And so in this video we're going to talk about something called the market for lemons, okay? We're going to talk about lemon markets, and I'm not talking about citrus. I'm talking about situations where things are just not working out the way they ought to. So let's work this through and say we're going to call will look at the general lemons problem. This gentleman George Akerlof won a Nobel Prize on a lot of what he did with lemoms. He wrote the original paper called the Market for Lemons, and then he wrote a bunch of other papers about about this particular issue. This particular issue goes under the category of something called asymmetric information. And asymmetric information says some market participants have more information than others. Some market participants to have more information than others. And that asymmetry of information can sometimes lead to really bad outcomes, okay? And we're going to talk a bit about that as as we as we go forward. Back a bit about George, George Akerlof wrote a lot of very important papers, often he did win a Nobel Prize. We mentioned when we talked about Nash, that Nash won a Nobel Prize on the basis of basically one idea, which was pretty much unheard of. But that one idea was so out there, was such a gigantic improvement and so important in economics today and to political science and other profession. [COUGH] Excuse me, so important that he won a Nobel basis that. Akerlof was a typical type of Nobel Laureate, he wrote a lot of stuff, a lot of great articles on a lot of different areas. He's retired now, he was at Berkeley, he still lives there. Asymmetric information says some market participants have more information than others and that can lead to some problems. So sometimes it's not that hard to solve this problem. So sometimes the problems are not that bad. So I got to think here about sick crabapple. I got a crabapple tree in my backyard. It's actually the pride and joy of my backyard for me. It's kind of provides shade over the patio. It's a beautiful flowering tree in the springtime. It's been it's just been great, but it's not doing the best, in fact, there's a lot of crabapples in town that are not doing the best. There's some stuff going around, but I called a guy out to look at it. And he came out and he looked at he says that's this tree sick and I can save it for you, but it's going to cost, and then he gives me a large number. I mean, I thought it was large like 3 or $4,000 to fix the crabtree, and I said really? Now see there's information asymmetry there. I'm an academic economist and, I know a lot about microeconomics, but I don't know anything about fixing crabtree's who are sick or a bit sick. But in this case, even though this guy had asymmetric information over me, I also know there are other people in town, so I can get a second opinion. I can say, hey, hey, all right, let me talk so I can invite a couple other guys to come look at my house and tell me what they think. And they all said the same thing pretty much they exactly what the of the first person said. And they talked about the same type of treatment get it sprayed it twice a year. People walking around my backyard looking like they were on the movie set of outbreak. They get covered in of all these things and they're shooting stuff, they covered all my patio furniture up with big tarps. And said don't move that for two days, don't let your dog walk around the backyard all these sorts of things but I work and it was much cheaper. So that's a problem asymmetric information. I can solve that sometimes annoyingly inefficient market results, what we call curbside depreciation. Suppose you go out and buy yourself a new car on a lark, it's Friday afternoon you feel good, and you say I'm going to go out and buy a new car you buy that new car. It's got like two tenths of a mile on that's how long it took them to drive it from that truck that unloaded it into the cleanup bay where they cleaned it all up and then out to the lot. You get in that car say this is my baby, buy it and take off. Now over the weekend you begin to start thinking about the fact that your kids are still in college, and you got all this tuition, you got to pay and you got all this other stuff. And you say, I don't think I should have this car, I should have bought this car. And you drive back in on the next week's, it's been a three-day weekend. And so you drive it back in on Tuesday and you say, hey, I can't keep this car, I want to sell it back to you back to you, all my money back. And he says, excuse me, sir. And at that point in time, the average is about a 17% depreciation right there, it's called the curbside depreciation. You drive it off a lot, it's going to come back, even though you've only put on it about a 180 miles over that of that three-day weekend, the market is going to knock it down now. My dad not an economist, never went to college. My dad would say those crooks, the auto dealers, they're in cahoots with each other and they're just out to stick to you in that case. But economists like George Akerlof, they said, that's really not true. See what's happened here is that now you have great asymmetric information over the dealer. The dealer never really drove the car, the dealer knows a lot about that line, they sell maybe five or six of those models every month, okay? But that one that you drove they don't know a lot about less than two-tenths of a mile. You on the other hand, have 180 miles on it, you know an awful lot about that car. And when you pull back in and say I want to sell this car back they say, really now? And so the market for lemons says that the equilibrium in that market will be where you're going to take a big chunk of of hair out. They're going to give you a big haircut at that particular point because as a know there's something wrong with the car. And then they're going to have to pedal this to somebody else. So that's a market where the information asymmetry means they're not going to be able to offer you the value that you really think it's worth. You paid 20,000 for it on Friday and the following Tuesday they want to cut and they want to take 15% off the top on that, that's called a bad deal. Let's go a little bit farther, we got one more here that I want to talk about sometimes. These outcomes can be very bad, okay, and the example that is insider trading. It insider-trading is illegal, you probably heard about this before. If you read the Wall Street Journal you see there's somebody going up for insider trading probably once a month. Then somebody will be arrested and that usually makes the front page of the Wall Street Journal. Insider trading means that you're selling or buying stock in a company because you know something about that company. Because either you are the insider and you're working for that company or one of your friends is. He gets on the phone says, don't tell anybody you heard this but we're about to be acquired next week. There's going to be a big merger announcement if I were you I'd get as much stock as much of our stock as you possibly can in the next few days. Call your broker and tell them to load up on it because come next Wednesday, it's going to look great. You do that, you're going to go to jail. Ask Martha Stewart these people who have this situation, where someone who's in a company tells them some information and that they use and later make themselves better off, bad will happen to them. Now, lots of people think the rules for insider trading is because we don't like the fact that people, that's it's inequitable. Why did I should those people get rich and I can't it's not fair, it's not fair. Well, you may we you may agree with that, but the economist says the real reason that we don't like Insider trainings is because of the market for lemons, okay? If this asymmetry of information and if there's enough of out there when you pick up the phone and you try to buy a stock and I said, yeah, I can sell that stock to you. Almost then you wonder, I wonder what he knows that I don't, okay? Or somebody calls you and says, hey, you want I know you've been sitting on that IBM stock for a long time, I've got some buyers who want to buy it, you want to sell yours? I wonder what he knows that I don't. So to the extent that people believe that there's lots of people out there in the market who have information that they don't have, you're going to get the market to slow down. Okay, the market in going to be not as liquid as it usually is, instead of being nice fluid market, it's going to be more like maple syrup, sticky, some transactions here, some transactions there, and we don't like that that's inefficient. Okay, so there can be lots of problems in this program, I've got like one last example here. Suppose you're looking for a 1968 Dodge Dart. You wanted the Dodge Dart for a long time, 68, great model year and you say I'm going to find you one of these cars. And you come with some great information, you go to Consumer Reports and you look up. And right now they say there's a 50% probability that if you see a Dodge Dart out there, there's a 50% probability, that's good and the 50% probability that it's bad. I don't know for certain, I'm making this up, right, but you can find it. Consumer Reports, they'll have these numbers year by year by year for the Dodge Dart. About what's the likelihood that a 1968 Dodge Dart would be in good shape or bad shape. I just pick the 50% and picked the 68, I just picked those numbers because it's easier for us to work through the math, I didn't look them up really. But suppose that same issue says that if it's good, it's worth $10,000, if it's bad it's worth $5,000. Now your tooling down the road, and you look over off the field, over watch his farmhouse. And right there in the driveway of this farmhouse is a 68 Dodge Dart. And you pull up and it's got a sign in the window says for sale. Well you go right up to the front door and knock on the door and you say to the person. Hey, you want to sell the Dodge Dart? Sure I do sure do, and they say, how about you want to get me? And you set the going there's a 50% chance that it's worth $10,000 and there's a 50% chance on something worth $5,000. So on average is probably worth 7500, that's a good average, but I think I'll lowball on him, I'll offer him just 6,000. So I go up and I offer 6,000, and that person turns to me and says enjoy your new car and takes a 6,000. Immediately realize what that was a bad car, okay, that car is really only worth $5,000, that's one of these people. It was 50% chance, it could be good or bad and if it's bad as 5,000 you offered 6,000. The owner, she knew it was bad one, and she'll take the 6,000 and you have a $5,000 car, okay? That's just not a good deal for you. All right, if you if it was a good car and you over 6,000 she say no, way I can insult you for this. So what happens in these markets for lemons? The asymmetric information means the the best you can do is you're going to end up bidding just $5,000 because you don't know it. If you're bidding anything above $5,000 and it's a it's a cheap car, it's a bad car, you overbid. A bad deal, market for lemons could mean that a lot of markets just don't happen, and when they do happen, sometimes it's inefficient. Thanks.
