Consider the used car market with adverse selection as in Akerlof's market for lemons. As in Akerlof's model discussed in this course, suppose the quality of used cars, , is a uniform distribution betweenand ,denotes the quality of car , sellers value any carat , and buyers value any carat(note that ). Suppose the government sets a minimum car quality guarantee of . Recall that one priceexists in the market because buyers cannot observe car quality.

Suppose the government sets a minimum car quality guarantee of . Recall that one price exists in the market because buyers cannot observe car quality.

Briefly explain how a government minimum car quality guarantee helps limit adverse selection in Akerlof's market for lemons.