The Market for Lemons

Akerlof (1970) pointed out that when there is asymmetric information with the seller knowing more about the true quality of the product than the buyer, the only items up for sale will be lemons. The Treasury is likely to be in just this position when it offers to buy toxic assets from over-extended banks. Talk of ‘eventually making a profit’ from the purchase of such lemon-flavored assets thus seems, at best, overly optimistic.