 In this section I will be explaining the lemons problem with respect to the security market. Basically the concept of lemons problem was promulgated or presented by a very famous Nobel Prize winner economist whose name is George Eckerlof. So George Eckerlof explained the concept of lemons problem in the context of the used cars. Basically what what his theory of lemons problem is says that when we are going to buy a car from the used car market we don't know we just look at the overall image overall picture or overall the way the car looks. We just look at the paint and the physical structure of the car but we do not know what lies inside the used car. It may be exited it can have some problems with the engine. So basically we don't know unless and until we are actually using that car only then we will be able to find out what is wrong about that used car. So basically what we are trying to do is we are trying to explain the values valuation of the securities that we buy or sell in the financial market by applying the concept of lemons problem in understanding how the value of the security is determined in the financial market or the market for the securities. The way we the way we are not the way we do not know the inside of a used car when we have to buy a used car we are we have to rely on the outlook or the or the aspects which are visible to us in order to decide that this would be the price of the used car. Similarly we do not know the inside of the financial well financial security or the financial instrument which we are going to buy that whether it is going to help us in earning a higher return or a lower return that is a question that that is a big question mark. So therefore we have applied this concept of lemons problem to the valuation of the securities and now the question arises what is meant by the lemons problem again as I mentioned earlier that since we don't do not know how the firm is going to actually behave or actually earn the profits in the long run whose securities are on sale or whose stocks are for being are available in the market to for to do that are available in the market for the investors to invest their money in. So it's similar to the lemon market of used cars and basically if the firm is a very good firm or the security ends up with in terms of a higher rate of return we do not know because we might consider it that it there may be a problem with the firm and similarly there could be another type of category of firms available in the market who are not going to behave nicely in the long run or in the future and if we invest in the stocks of that those firms the return will be bit low as compared to what we can expect. So as a result of all this what happens actually is that the firms who whose return is going to be higher and the firms whose returns are going to be lower are not very clear to the to the investors because of the asymmetric information problem I explained this concept earlier when we say that the level of information is not the same among all the buyers and all the sellers of a financial instrument then we say that there is a information asymmetry. So if the if the if all the different types of financial instruments are available in the market and we do not know whether the instrument which I am investing in is going to end up in high profit or low profit I might end up paying the average price of for that particular stock and by the end of the day what happens if everybody else thinks or behaves like me that I am expecting since I cannot because of the information asymmetry I cannot differentiate between a good stock or a bad stock or a stock issued by a good firm a profitable firm on a stock issued by an a bad firm or a firm whose rate of return is not very high. So as a consequence of all this I end up in valuing the stock as an average value. So even if the the firm is a highly profitable firm I might not consider that as a highly profitable firm I might end up like valuing the stock of that particular firm as an average price stock and so will be the case in case of the firm having a low price a low level of return and as a result what what will happen in the market the average valuation will be decided the valuation of that particular stock will will be determined because of this or this type of perception in the market at an average level so the highly profitable stocks will be rated low and the poorly behaving firm stock will also be priced as an average price and as a consequence what happens that they would be there would be the the the price will be determined at a relatively lower level for the higher better performing firm stock and the benefit will go to the firms who are not going to perform nicely in the long run so this type of an issue is there in the in the bonds market or in the securities market that is experienced and the the way out to this problem is that whenever there is there is a bit more information available for a firm that helps the investors to take better decisions