Forums Economics Assignment Help What is the diamond-water paradox? How is it solved

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    kritinidhi
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    What is the diamond-water paradox? How is it solved

    #16427

    kritinidhi
    Member

    The theory of marginal utility is based on the subjective theory of value. The marginal theory of a good is derived from its most important use to a person. But the paradox of value is contradicted by this fact. The paradox of value is also known as diamond-water paradox. According to this, although water is whole more useful, in terms of survival than diamonds still, diamond command higher market price than water.

    In explaining the diamond-water paradox, marginalists explains that it is not the total usefulness of diamonds or water that determines price, but the usefulness of each unit of diamond or water. It is true that the total utility of water to people is tremendous because they need it to survive. However, since water is in such large supply in the world, the marginal utility of water is low. In other words, each additional unit of water that becomes available can be applied to less urgent uses as more urgent uses of water are satisfied.

    Therefore, any particular unit of water becomes worthless to people as the supply increases. On the other hand, diamond is of low supply that the usefulness of one additional diamond is greater than the usefulness of one additional unit of water, which is abundant in supply.

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