This would ensure that prices are kept high enough

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do not incur a loss of welfare. This would ensure that prices are kept high enough that the sellers of high-quality cars do not exit the market and thus preventing the problem of adverse selection.
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(b) Discuss the view that government intervention to correct the above market failure is always desirable. [15] Suggested Body 2: Govt intervention can address market failure due to adverse selection by having regulations such as the “lemon law” <Evaluation> One possible consideration when using this policy is that the lemon law may not always be well understood. Some consumers may misunderstand this to be like a warranty and thus be careless with the second-hand cars they buy and trying to claim a refund for damages that they cause themselves. This causes a situation of moral hazard if consumers successfully abuse the lemon law in this way as consumers would no longer bear the cost of their reckless behaviour. This abuse could lead to sellers of second-hand cars to be reluctant to sell their cars as they are wary of being taken advantage of by unscrupulous buyers. In such a situation, the government intervention is undesirable as it could potentially collapse the market for second-hand cars. Thus the desirability of this intervention depends heavily on the government’s ability to successfully implement it and monitor for abuse.
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(b) Discuss the view that government intervention to correct the above market failure is always desirable. [15] Suggested Body 3: Govt intervention can address market failure due to adverse selection with regulations on vehicle screening and inspections Governments can address adverse selection in the second-hand market through imposing rules regarding screening and signalling. A possible policy that could be implemented is making it mandatory of potential sellers to go for a vehicle inspection first before they are allowed to sell their cars. The certificate of inspection then serves as a signal to the potential buyers that correct the asymmetric information, allowing the buyers to know whether the quality of the car is high-quality or low-quality. Buyers are then able to offer prices according to what quality of car they are receiving, eliminating the problem of adverse selection.
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(b) Discuss the view that government intervention to correct the above market failure is always desirable. [15] Suggested Body 3: Govt intervention can address market failure due to adverse selection with regulations on vehicle screening and inspections <Evaluation> However it is not always desirable that the government intervene. It is possible for the market to implement this solution themselves. Since the sellers of high-quality cars and the buyers of high-quality cars both gain welfare in the transaction of high-quality cars, there is sufficient incentive for the sellers to incur extra costs in order to signal the quality of their cars to potential buyers. Thus it is not necessary for government to implement such a law as the sellers can engage in their own solution. It is more desirable for the market to find their own solution to this as it
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