Consider the market for lemons problem. Suppose there are six cars of quality Q, distributed evenly from Q=.75 to Q=2. Buyers value Q at $800; sellers at $600. Sellers know the Q for their cars with certainty, but buyers cannot and therefore assume average Q. How many cars sell? Is there market failure? starting avg Q=1.375 Buyers value: $800 per Q Sellers value: $600 per Q buyers offer: 1.375800=$1,100 The buyers' comfortable offer is lower than the highest car valued by the sellers ($6002=$1,200) therefore there would be a market failure since all the cars do not sell. Due to adverse selection it drives out all cars valued by sellers at more than 1