Is there a deadweight loss in this used car market and why?
On the plums side we can make a pareto improvement by exchanging information and matching 200 buyers and sellers who will gain from trade.
On the lemons side, we can't say for certain that it is inefficient. Lemons are being exchanged at the expected value of a car (50% of cars are plums and 50% are lemons) which is 12k. This becomes the maximum WTP of an ignorant buyer, so the exchange is not inefficient, there are equity issues but not efficiency issues. A Pareto improvement is not possible because any gain that buyers make when given information (they will keep their money in their pockets) is a loss to sellers. (Is this correct? the sale of 600 lemons is Pareto efficient but why can you not return to this point once you're off equilibrium without making sellers worse off?)
So is the deadweight loss the 400k on each side, or just the 400k in the plums market, or is it something else - 2 million on the right hand side for example because the true WTP is 16k? What do you think?