Diamond-Water Paradox

Subject – Science and Tech

Context – diamonds are much more expensive than water

Concept –

Also known as the diamond-water paradox, the paradox of value describes the vast difference seen in the prices of certain essential goods and non-essential goods.
Many goods and services that are essential to human life have a much lower price in a market economy than other goods and services that are not so essential.
- For example, water that is essential for human existence sells at a price that is just a fraction of the price of diamond, which is a luxury item that is not essential for human existence.
The paradox of value has also been used to describe the vast difference in the wages of essential workers such as nurses and farmers and that of others such as CEOs of companies, who are considered by many to be nonessential workers.
- This paradox has been cited by many critics of the market economy, who argue that it is an unfair economic system that leads to inequality among different populations.
The paradox of value is often used in discussions on the theory of value to elaborate the concept of marginal utility and how the use value of an object can differ quite a lot from its exchange value. Many economists have tried to explain the paradox.
Some of them such as Adam Smith, who was a proponent of the labour theory of value, believed that the paradox of value can be explained by the difference in the amount of labour that it takes to produce a good or service.

Theory of Marginalism

It argued that the price or the exchange value of goods and services is not determined by their simple use value. Instead, it is determined by their marginal use value (or utility) to the buyer.
This is the most widely accepted resolution of the paradox of value among economists.
Marginalism is a theory that asserts individuals make decisions on the purchase of an additional unit of a good or service based on the additional utility they will receive from it.
- That is, value is determined by how much additional utility an extra unit of a good or service provides.
Marginalist theory, known as the Marginalist Revolution, is seen as the dividing line between classical and modern economics.
Marginalism theory helps to better explain human rationality, human action, subjective valuation, and efficient market prices.
The difference between total utility and marginal utility is explained through marginalism.