Adverse selection in markets:

Look  at a model  of  market where two parties (principal and agent) have different information about  the  qualities of the goods being sold. Suppose there are 100 people in this market  who want  to sell their  used  cars and another 100 who want to buy  used  cars. Everyone knows that 50 of the cars are 'plums'  (good  quality cars)  and  50 are 'lemons' (bad quality cars). The owner of the car selling knows  its quality whereas the prospective buyers do not have such private information.  

Search for the source of market failure will indicate that there is an externality between the sellers  of  good cars  and  bad  cars. The seller of a bad car is affecting the purchasers' perceptions of the quality of the average car on the market. Such a possibility lowers the price that they are willing to pay  for the average car. Consequently, the people who  are trying to sell good  cars are thrown out of the market. The signals emerging from the market is that  low-quality items are offered for sale.

After George Akerlof pointed out the problem in  1970, it  has been used extensively to analyse other markets. See that you are classifying information by what there  is lack of information about. So, it will be possible for you put adverse selection  in  the category of hidden information. That is, one side of the market  -  either buyers or  sellers -  has better information than the other side.  If  we  say,  the  agent has some private knowledge about her cost  or valuation, which the principal does not know, than we have the case  of adverse selection or hidden knowledge. First, the principal offers the agent a contract, with the asymmetric information. Then, the agent takes an  observable action and the outcome  is realised. Here, the principal's problem stems not from the future unobservability  of  the agent's action,  but  the realisation that he might be dealing with different types of people.