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Why water is cheap and diamonds cost a fortune
💡 Price reflects the value of one more unit (marginal utility), not an item's total usefulness — which is why abundant essentials stay cheap and scarce luxuries stay pricey.
Water keeps you alive. Diamonds are shiny rocks. So why does a bottle of water cost less than a coffee, while a diamond ring can cost a year's salary? Adam Smith puzzled over this in 1776, calling it the diamond-water paradox. The answer isn't about how useful something is in total — it's about how much you value one more unit of it.
Economists solved the riddle with marginal utility: the extra satisfaction you get from the next unit of something. Because water is abundant, you already have plenty, so one more glass is worth almost nothing to you. Diamonds are scarce, so getting one more is a big deal. Price tracks this marginal value at the margin, not the total value.
This flips our intuition. The total value of all the water on Earth is basically infinite — we'd die without it. But since it's everywhere, its price collapses toward the value of the last drop, which is tiny. Scarcity, not usefulness, drives what we pay.
The same logic explains everyday choices: the first slice of pizza is heavenly, the fourth is 'meh,' and the sixth might make you sick. As you consume more, each additional unit delivers diminishing satisfaction — which is exactly why you eventually stop buying.