Mitigating Lemons Problem II: Increasing the Average Quality in the Market

The lemons problem describes a situation where buyers cannot easily distinguish between high-quality goods called plums and low-quality goods called lemons. However,  the average quality can be increased by bringing more high-quality goods into the market.

In the used car market, a leasing program can be used to increase the number of high-quality cars.

Here, the buyer of the used car is called the lessee, and the seller is called the lessor.

The lessee acquires the car for a specific period, typically two or three years. 

The lease agreement typically requires that the lessor provides a vehicle that meets certain quality standards. For example, a car should be at most six years old, have fewer than 80,000 miles on the odometer, and be thoroughly inspected. This means that high-quality cars usually enter the used car market.

This rise in quality makes buyers more confident and willing to pay higher prices, reducing the impact of the lemons problem.