As the secondary market for electric vehicles (EVs) grows, third-party insurers have introduced extended warranty policies to cover the high replacement cost of degraded lithium-ion batteries. A comprehensive warranty plan for a 3-year-old EV typically costs around £300 per year, but this can climb to over £1,500 per year for vehicles older than 8 years, where battery degradation is more severe.
Warranty providers base their premiums on average degradation models. However, actual battery health depends heavily on the previous owners' charging habits (such as frequent fast-charging to 100% and exposing the vehicle to extreme temperatures), which are highly costly and complex to diagnose remotely. Despite pre-warranty diagnostic reports, economists warn that the viability of the EV extended warranty market is threatened by market failure arising from asymmetric information.
Using the information in Extract B, explain how 'asymmetric information' can lead to market failure in the market for extended EV battery warranties.
