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urities Markets 1. If can’t distinguish between good and bad securities, willing to pay only average of good and bad securities’ values. 2. Result: Good securities undervalued and firms won’t issue them。 bad securities overvalued, so too many issued. 3. Investors won’t want to buy bad securities, so market won’t function well. Explains Puzzle 2 and Puzzle 1. Also explains Puzzle 6: Less asymmetric information for well known firms, so smaller lemons problem 169。 2022 Pearson Education Canada Inc. 88 Tools to Help Solve Adverse Selection (Lemons) Problem 1. Private Production and Sale of Information Freerider problem interferes with this solution 2. Government Regulation to Increase Information Explains Puzzle 5 3. Financial Intermediation A. Analogy to solution to lemons problem provided by usedcar dealers B. Avoid freerider problem by making private loans Explains Puzzles 3 and 4 4. Collateral an