Paradox of Value

What is the paradox of value?

The paradox of value, also called the diamond-water paradox or value paradox, asks why something essential, such as water, can have a lower exchange price than something less necessary, such as a diamond.

Adam Smith’s discussion distinguishes use value, the usefulness of a good, from exchange value, what it can command in exchange. That distinction states the puzzle; marginal utility helps explain it. Jevons’s account of utility helps explain why the value of an additional unit differs from the total usefulness of all units available.

Marginal utility: the value of one more unit

When water is plentiful, another unit may add little benefit; during a drought its value can rise sharply. This is an explanation of valuation at the margin, not a judgment that water is unimportant or that any observed market price is morally justified.