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The death of formal credit markets

By: lalit sharma

The market for used cars is an example of the problem of quality uncertainty. You get both good used cars and defective used cars but the buyer of the car does not now beforehand if it a good car or a bad one. So the buyers best guess for a given car is that the car is of average quality; accordingly, he or she will be willing to pay for it only the price of a car of known average quality. So the owner of a good used car will be able to get a high enough price to make the selling that car worthwhile. So the owners of good cars will not place their cars on the used car markets leading to the possibility of withdrawal of average quality cars on the market, causing the buyers to revise downward their expectations for any given car. Further it would motivate the owners of moderately good cars not to sell, and so on resulting in the bad driving out the good from the market.

Here, the average of the quality of the used cars on the market is in the ratio of 1:2. There are also a large number of sellers who are willing to sell a quality car for a fixed price. And if quality were observable, then the price of the used cars would be fixed resulting the car be sold for the right price leaving everyone happy. If the quality of cars is not observable by the buyers, then it seems reasonable for them to estimate the quality of the car offered to the market using the average quality of all cars and based on this estimation, the price of the car is fixed. American state laws provide a remedy for the purchasers of used cars that repeatedly fail to meet standards of quality and performance. These laws are called as lemon laws which cover anything mechanical, as do the federal laws.

If you purchased a used car there are two situations in which you may be qualified for cash or other lemon law benefits: You may be entitled to compensation for breach of warranty. When no manufacturers warranty exists if you do not have a manufacturers warranty of any kind you may be entitled to compensation for violations of consumer protection laws that fall outside the lemon laws. Lemon laws vary from state to state, so accurate information on the scope and restrictions of lemon laws in a particular state should be obtained from an attorney practicing in that state. Technical service bulletins are instructions from the manufacturer that alert dealerships of specific defects or necessary repairs in certain models. However these services do not mean the vehicle has a recall or mean the repair will be paid for by the manufacturer.

Article Source: http://www.articles4meandu.com

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