Description
In “An Inquiry into the Nature and Causes of the Wealth of Nations” published in 1776, Adam Smith wrote:
“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”
Explain the diamond-water paradox and find out in the literature how economists have later solved this paradox.
***Need help writing the above essay for my Microeconomics class, around 2 and half to 3 pages max. The university uses BB Safe Assign tool, therefore, the essay must be unique
Explanation & Answer
Attached.
Running Head: DIAMOND WATER PARADOX
Diamond Water Paradox
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DIAMOND WATER PARADOX
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Diamond Water Paradox
The reality of life is that value or usefulness of a product does not always increase the
price of a product. In particular, the fact that human beings need water to survive more than they
need diamonds does not translate to a relatively higher price for a unit of water. In contrast,
people are willing to pay a higher price for diamonds even though they are not central to their
survival. This phenomenon is known as the diamond-water paradox and was first proposed by
Smith (1776). In justifying the paradox, Smith (1776) acknowledged that water would purchase
nothing in the market while diamond had the potential of buying a lot of things. The diamond
water paradox is perhaps best illustrated through regular products that people purchase and
wonder why they are costly. Essentially, therefore, the diamond water paradox explains the
discrepancies in financial transactions of goods and products.
The diamond water paradox is based on the notion that practical things that are used to
meet daily ne...