  The Market for Lemons is a classic model of asymmetric information first
studied by Nobel Prize economist George Akerlof. It shows that information
asymmetry between the seller and buyer may result in market collapse or some
sellers leaving the market. "Lemons" in the used car market are cars of poor
quality. The information asymmetry present is that the buyer is uncertain of
the cars' true quality. I first offer a simple baseline model that illustrates
the market collapse, and then examine what happens when regulation, ie. a DMV
is introduced to reveal (signal) the true car quality to the buyer. The effect
on the market varies based on the assumptions about the regulator. The central
focus is on the DMV's signal structure, which can have interesting effects on
the market and the information asymmetry. I show that surprisingly, when the
DMV actually decreases the quality of their signal in a well constructed way,
it can substantially increase their profit. On the other hand, this negatively
effects overall welfare.
