Why Is it that a glass of water. so vital to life, is worth hardly anything, whereas a diamond, which has no practical use, is so valuable? This is the so-called paradox of value, discussed by philosophers and economists down the ages, and perhaps most notably by the 18th-century Scottish economist Adam Smith.
The paradox of value of value the proposition that the value (PRICE) of a good is determined by its relative scarcity rather than by its usefulness. Water is extremely useful and its TOTAL UTILITY is high but, because it is generally so abundant, its MARGINAL UTILITY (and, hence, price) is low. Diamonds, by contrast, are much less useful than water but their great scarcity makes their marginal utility (and, hence, price) high.
The paradox of value (also known as the diamond-water paradox) is the apparent contradiction that, although water is, on the whole, more useful, in terms of survival than diamonds, diamonds command a higher price in the market. The philosopher Adam Smith is often considered to be the classic presenter of this paradox.
The paradox can be resolved with the concept of ‘marginal utility’.
Utility is the pleasure or well-being from the consumption of a good such as a grape. Marginal utility is the pleasure that is gained from an extra unit of consumption, so if I eat five grapes the marginal utility is the extra pleasure I received from the fifth grape Marginal utility tends to decline the fifth grape probably gave me less extra utility than did the first. Because diamonds are so scarce, their marginal utility is very high and they, therefore, have a high value in contrast, because water is readily available in most parts of the world, the marginal utility of an extra drop is much lower.