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Guarantees and Warranties: Solutions To The Lemon Problem

The document discusses several solutions to the lemon problem including guarantees and warranties, industry standards, external product certification, consumer protection regulation, liability laws, licensing, and social regulation.

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30 views1 page

Guarantees and Warranties: Solutions To The Lemon Problem

The document discusses several solutions to the lemon problem including guarantees and warranties, industry standards, external product certification, consumer protection regulation, liability laws, licensing, and social regulation.

Uploaded by

lc
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Solutions to the Lemon Problem

Of course, there is more than one solution to the problem of asymmetric information, or "how
to avoid buying a lemon."

Guarantees and Warranties: 

Guarantees and warranties benefit both the firm, by attracting customers with an assurance of


higher quality goods and services, as well as consumers who, in the case of receiving a faulty
product, can return the item or have it replaced. Almost all electronic device makers, for example,
offer warranties.

Industry Standards: 

Firms may set requirements to produce goods and services that meet industry standards, thus
attracting customers who might not be able to properly evaluate the industry's products and services.
This method is practiced most often by high-quality producers of goods and services who wish to
differentiate themselves from low-quality producers.

External Product Certification: 

Similar to creating industry standards, firms may attain external product certification so that
consumers can rely on expert verification of the quality of their goods and services.

Consumer Protection Regulation: 

In many industries and governments act to address asymmetric information by implementing


consumer protection laws designed to set a standard by which all firms must legally comply. For
example, credit card issuers are subject to consumer protection laws set forth by the government.

Liability Laws: 

Liability laws are part of consumer protection regulations as established by the government.
Firms may be subject to penalties and fines if minimum industry standards are not met.

Licensing:

 Licensing falls under consumer protection regulations as well. A firm, such as a public
utility, might require a license by the government to sell certain goods and services.

Social Regulation: 

Social regulation is a significant measure taken by the government when other consumer
protection laws fail to provide adequate regulatory functions. Oversight of a nation's banking
industry is a type of social regulation designed to protect everyone.

https://www.investopedia.com/articles/pf/11/solutions-to-lemon-problem.asp

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