Passage 2
This year’s Nobel Prize for economics honors work inspired by a simple observation about used cars.
Today’s global economy is a colorful landscape. Brands are ubiquitous, sprouting from billboards, television and magazine advertisements that relentlessly praise the virtues of products. Humans themselves are not immune: American business leaders advise executives to style themselves as a product, “Brand You.”
But brands do help to make the world easier to navigate. A Coke or a Big Mac, say, is almost the same everywhere in the world. The customer knows the quality of a product by its brand. To understand why brands are so valuable an economic innovation—despite being laughed at by the anti-globalization lobby—you need only imagine what happens when sellers offer a product whose quality a buyer cannot easily judge.
Take the frustratingly familiar problem of buying a used car. Assume that used cars come in two types: those that are in good repair, and “lemons” as Americans and most economists call them. Suppose further that used-car shoppers would be prepared to pay $20,000 for a good one and $10,000 for a lemon. As for the sellers, lemon-owners require $8,000 to part with their old car, while the careful-driver old lady with the well-maintained car won’t part with hers for less than $17,000. If buyers had the information to tell wheat from chaff, they could strike fair trades with the sellers, the old lady getting a high price and the lemon-owner rather less.
If buyers cannot spot the quality difference, though, as is often the case in the real world, there will be only one market for all used cars, and buyers will be ready to pay only the average price of a good car and a lemon, or $15,000. This is below the $17,000 that good-car owners require; so they will exit the market, leaving only bad cars. This result, when bad quality pushes good quality from the market because of an information gap, is known as “adverse selection”. This was the simple but powerful insight of one of this year’s Nobel winners, George Akerlof, in a seminal 1970 paper.
Theories that deal with similar instances of so-called “asymmetric” information—when one party to a deal knows more than the other—link all three of this year’s winners. It seems that a great many markets, including those for shares, labor, insurance and banking, often resemble a used-car sale more closely than a McDonald’s restaurant.
56. How do the customer judge the quality of a product today?
57. What does the logo “Brand You” probably mean?
58. What does the word “lemon” mean in this passage?
59. Buyers will be ready to pay only the average price for any used car because ________.
60. It can be inferred that ________.
