Jessica lists her faulty treadmill for sale on craigslist but does not disclose the problems with it. If Blake buys the treadmill believing that it's problem-free, this is an example of market failure due to:A. the existence of external costsB. the existence of public goodsC. the lack of competitionD. asymmetric information

Question

Sullivan Odom

Business

30 March, 11:42

Jessica lists her faulty treadmill for sale on craigslist but does not disclose the problems with it. If Blake buys the treadmill believing that it's problem-free, this is an example of market failure due to:A. the existence of external costsB. the existence of public goodsC. the lack of competitionD. asymmetric information

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Answers (1)

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Ethan Paul · Answer 1

The correct option is (D)

Explanation:

Asymmetric information happens when one party to a contract or transaction is fully aware about the material facts of the product that he intends to sell. However, the other party is not aware about certain facts about the product. This is a case of asymmetric information.

A disadvantage of asymmetric information is that it could have fraudulent consequences like adverse selection. In this case, Jessica (seller) knew about the defects of the product but chose not to disclose the same and Blake makes an adverse selection without knowing the defects of the product.

This is an example of market failure due to asymmetric information.