What is Diamond Water Paradox

What is Diamond Water Paradox

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In Economics, the term Diamond Water Paradox has absolute importance. This term as in the name relates with the both Diamond and the Water. This Paradox was introduced by the economist Adam Smith.

Even if the water is a major essential thing for a living, has less value compared to the Diamond. And even if we can live without the Diamond, it values as high as the sky goes up.

What is Diamond Water Paradox?
Water is demanded by everyone but has less value. Diamond is demanded by a few has tremendous value. Why does this happen? Let’s see.

This condition is explained with the concept of marginal utility. Marginal utility means the importance of the object to the person. So the price of the object is determined using its importance.

Here, the water’s one marginal unit is less important than the Diamond. The reason is the water is available in large while the Diamond is less found. So, if the marginal unit of water is found, it will still be less valued as compared to the newly found unit of Diamond.

Thus, people are not interested in buying high priced water but are happy to purchase a Diamond for the sky-rocket price. This is what the Diamond Water Paradox is.

You may also be interested in learning dosa economics. What is it? Read this article – Raghuram Rajan’s Dosa Economics


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