CIMA BA1 · Chapter 8 · Question 5 of 9
In the market for used cars, sellers know more about the quality of the cars than buyers do. This is an example of:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) Asymmetric information, which can lead to adverse selection
Explanation
When one party to a transaction has better information than the other, buyers may be unwilling to pay a fair price for good-quality cars. Owners of good cars then withdraw, leaving a higher proportion of poor-quality cars - adverse selection - and the market may fail.
More Market failure, externalities and competition policy MCQs
- Q7Which of the following is a typical function of a national competition authority?
- Q8A natural monopoly is most likely to arise when:
- Q9Which of the following is an argument AGAINST the privatisation of a state-owned utility?
- Q1A pure public good is characterised by being:
- Q2Where the production of a good creates a negative externality such as pollution, a free market will tend to: