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The Diamond-water Paradox

The diamond-water paradox can be explained in terms of definitions of the term “value.” One should be able to distinguish two aspects of the concept, which are value-in-use and value-in-exchange (Eggert et al., 2018). The former definition focuses on the utility and use of the object, which makes water highly have high value-in-use. In the diamond’s case, it has a high value-in-exchange because a wide range of different items can be exchanged for it. In addition, one needs to take labor into account when considering the value of something. The main reason is that there is no direct relationship between utility and price because the latter also includes the amount of labor put into production.

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Later, Eugen Ritter von Böhm-Bawerk made a different set of arguments, which revolve around the inequality of value. Any additional unit of an object acquired has a varying amount of value, which can be illustrated in the example of a water bottle. A thirsty man, who might die from dehydration, will put the highest amount of value on the first water bottle. However, the consequent water bottles offered will have incrementally less value compared to the very first one.

For instance, the tenth unit of water might have low value because it will be used for washing dishes. Therefore, the mere scarcity of diamonds makes the value of each available unit higher than water, which is more available. In other words, there is an excessive number of water units, where the vast majority of them are not as valuable. In contrast, there is a limited number of diamond units, which makes every piece highly valuable. Thus, price is a combination of utility, labor, and scarcity.

Reference

Eggert, A., Ulaga, W., Frow, P., & Payne, A. (2018). Conceptualizing and communicating value in business markets: From value in exchange to value in use. Industrial Marketing Management, 69, 80-90. Web.

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