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Diamond Water Paradox UPSC

This is the observation that water, which is essential for life, is usually much cheaper than diamonds, which are mostly used for decoration. How can this be?

The answer lies in the concept of marginal utility. This is the additional satisfaction or benefit that a person gets from consuming one more unit of a good or service. The more of something a person has, the less they value each additional unit.

For example, if you are very thirsty, you would value the first glass of water very highly. But after drinking several glasses, you would not want any more. The marginal utility of water decreases as you consume more of it.

On the other hand, diamonds are very rare and scarce. Most people do not have any diamonds, or only a few. Therefore, the marginal utility of diamonds is very high. People are willing to pay a lot for one more diamond, because it adds a lot of satisfaction or benefit to their lives.

The diamond-water paradox illustrates that the price of a good or service is not determined by its total utility, but by its marginal utility. The more scarce and desired a good or service is, the higher its marginal utility and price will be. The more abundant and essential a good or service is, the lower its marginal utility and price will be.

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