George Akerlof's 1970 example is used-car dealing, and the mechanism is worth walking through because it ends somewhere surprising.

A buyer cannot tell a good used car from a bad one. The seller can. So the buyer will only pay the average value of the cars on offer.

At an average price, owners of good cars find the price too low and withdraw. Now the average quality of what remains is lower, so the rational price falls. Which drives out the next tier of good cars. Which lowers the average again.

In the limit only the worst cars are traded, or the market disappears entirely. Nobody lied. The buyer's reasonable attempt to protect themselves against information they do not have is the entire cause.

The shape

One side knows something relevant. The other side's defense against not knowing it selects against exactly the cases they wanted.

It runs in insurance, where a price set for the average buyer is a bargain for the sick and an overcharge for the healthy, so the healthy leave and the pool worsens. It runs in lending for the same reason: raise rates to cover default risk and the borrowers who can get money elsewhere do, leaving the ones who cannot.

Where it operates in a service business

Pricing low. A low price is a defense against being rejected, and it selects for clients who choose on price — who are, on average, more demanding, slower to pay, and likelier to leave for somebody cheaper. The protection attracts the thing it was protecting against.

Broad positioning. Saying you serve everyone is a defense against turning work away, and it selects for clients with no specific need, who are the hardest to serve profitably.

Discounting to close. The clients who negotiate hardest at the start are, reliably, the ones who negotiate hardest throughout. The discount selects for the behavior.

Hiring on salary alone. Pay below market and you select from the people who could not get market. Pay far above market with no other signal and you select for people optimizing on pay.

What actually fixes it

The general answer is to replace the missing information rather than to price around it. Four mechanisms, all of which appear in real markets:

Signals. The informed side does something costly to distinguish itself — a warranty, a guarantee, a demonstrable track record. This is signaling, and adverse selection is the problem it exists to solve.

Screening. The uninformed side designs the offer so that different types self-select. A deductible that only a low-risk buyer would accept. A discovery process demanding enough that unserious buyers leave. A deposit. Screening works by making the choice itself reveal the information.

Reputation and intermediaries. Certification, warranties from a dealer, references, a platform that keeps score. All of these exist to move information across the gap.

Repeat dealing. If the same parties transact again, concealing quality stops paying. This is a large part of why recurring revenue relationships behave better than one-off transactions on both sides.

The one to remember

Any policy you adopt to protect yourself from what you cannot see will change who shows up. Before setting a price, a term or a rule defensively, ask which clients it repels and which it attracts — because the population is not fixed, and it is responding to the policy.