diamond-water paradox

economics

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July 16, 2026

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The diamond-water paradox, a concept explored in economics, questions why diamonds, which are not essential for survival, are vastly more valuable than water, which is crucial for life. This paradox is resolved by the economic principle of marginal utility.

Marginal utility refers to the additional satisfaction a consumer gains from acquiring one more unit of a good or service. While water has immense total utility because it's essential for life, its marginal utility is low due to its abundance. Conversely, diamonds have a high marginal utility because they are scarce, and each additional diamond provides significant satisfaction to those who desire them. Therefore, despite water's greater overall importance, the scarcity and high demand for diamonds drive up their price and perceived value.12

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Austrian school of economics
…answer to the so-called “diamond-water paradox,” which economist Adam Smith pondered but was unable to solve. Smith noted that, even though life cannot exist without water and can easily exist without diamonds, diamonds are, pound for pound, vastly more valuable than water. The marginal-utility theory of value resolves the…
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…answer to the so-called “diamond-water paradox,” which economist Adam Smith pondered but was unable to solve. Smith noted that, even though life cannot exist without water and can easily exist without diamonds, diamonds are, pound for pound, vastly more valuable than water. The marginal-utility theory of value resolves the…
Read More