Thursday, July 26, 2007

New Op-ed: Driving the Lemon Myth Off the Lot

Here is a new piece that I have up at Fox News:

If you have ever thought of buying a new car, you are undoubtedly familiar with the claim that as soon as you drive the new car off the showroom floor its price falls dramatically. Recent popular books have asserted that simply driving a new car off the lot reduces the price by 25 percent.

Many economists explain this drop as occurring because the people who are trying to resell their cars quickly are typically doing so to get rid of “lemons.” Even if your virtually new car isn’t a lemon, people who want to buy your car can’t be sure, so they aren’t willing to pay as much as your virtually new non-lemon car is really worth. It is the classic story of “market failure.”

Nice story—except it’s wrong. In fact, the widespread perception that a new car loses substantial value as soon as a buyer drives it off the lot is really just a myth, as we shall see.. . .

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