Question

Used cars in Poorland sold for about 20% less than new cars of the same model manufactured in the same year. However, price differences were reduced when certified used-car dealers entered into the market for used cars in Poorland. What explains this phenomenon

Answer 1

Adverse Selection is the phenomenon that happened in this case.

Step-by-step explanation:

Adverse selection is a commonly used term in economics. It refers to a condition where sellers have much information about the product. Buyers don't have information about some aspects.

In other words, asymmetric information (information failure) is utilized between both parties. In this case, the used seller will know much information about the product than the buyer. Since the buyer knows only the product's description given by the brand seller.

The used seller knows more since they already used it. Hence along with the description provided by the brand seller, they also know the other details such as the pros and other benefits of the product.