DIAMOND vs WATER PARADOX

The costs associated with sourcing natural diamonds and the shortage in their availability, increase their price and value over time. This opposite link between shortage and value is also known as the diamond and water paradox! The paradox examines an interesting question: why are we willing to pay more for a diamond than for water, even though water is essential for our survival and diamonds are used for adornment? According to Adam Smith, the word “value” has two different meanings. Sometimes it expresses the utility of an object, and sometimes the power of purchasing other goods, which the possession of that object conveys. He calls the first “value in use,” and the other, “value in exchange.” The things which have the greatest value in use have frequently little or no value in exchange; on the contrary, those which have the greatest value in exchange have frequently little or no value in use.

Diamond vs Water Paradox

Nothing is more useful than water: but it will purchase scarcely anything. A diamond, on the contrary, has scarcely any use-value; but a very great quantity of other goods may frequently be had in exchange for it.” Given that there is an abundant supply of water, the marginal utility of water is low. On the other hand, there is a much lower supply of diamonds, such that the usefulness of one additional diamond is greater than the usefulness of one additional glass of water given its near unlimited supply. Diamond consumers are therefore willing to pay more — and diamond sellers to ask more — for one diamond than for a glass of water. Following the economic theory of value, lab-made goods are like water — plentiful and accessible to all — whereas natural diamonds are, well diamonds, and they carry a huge value of exchange. From our standpoint, and diamonds are a finite resource. No more diamonds will be created in our life time. They are a rare resource. The rarity of natural diamonds is beyond question. And this rarity is a very important characteristic of natural diamonds. Therefore, while both natural diamonds and lab-made goods are fit for jewelry and adornment, lab-made are designed to depreciate over time. Only one of the two is potentially fit for long-term value preservation.