Final answer:
The "lemons problem" illustrates the impact of information asymmetry on market efficiency, originating from the buyers' fear of purchasing something of low quality, like a defective used car, without adequate information.
Step-by-step explanation:
The "lemons problem" is a characterization of how the information asymmetry problem interferes with the efficiency of a market. The term lemon refers to a low quality product, and it's particularly used in the context of a used car that is found to be defective only after purchase. Information asymmetry occurs when one party, typically the seller, has more accurate information about the product's quality than the other party, the buyer. This discrepancy leads to market inefficiency, as buyers may be hesitant to make purchases for fear of getting a lemon, particularly when the quality of a product is hard to ascertain in advance.
In markets with significant information asymmetry, buyers might decide to avoid transactions entirely or reduce the price they are willing to pay for goods, which can lead to market failure. The lemons problem also extends to labor and financial capital markets, where, for instance, an employer might struggle to determine the true quality of a job applicant. Employers must rely on signals like education, references, and past work experiences to make an informed decision without perfect information. The presence of imperfect information can thus have a profound impact on the equilibrium price and quantity in a market.