Why Are Diamonds More Expensive Than Water?

Diamond water prices
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Cape Town has weathered three years of drought, and the city is rapidly approaching what they’ve labelled “Day Zero”—the day the dams drop below 13% capacity, and the city switches its water supply off. This will  force residents to collect their allotted 25 liters per day in person, watched by security forces.

Suddenly, Cape Town is realizing what many of us take for granted as we run water at full blast while washing our teeth, filling dishwashers daily, and hosing our cars down weekly. Water is simultaneously one of the few things we absolutely cannot live without, and one of the things we value least.

The answer lies in a complicated phrase—”the law of diminishing marginal utility”—with a straightforward meaning.

Economist Adam Smith famously posed the question, “Why are diamonds more valuable than water?”  He meant to highlight that diamonds, for all their cultural significance, are functionally useless. Writing for the American Water Works Association, marketing strategist and executive Melanie Goetz addressed this paradox.

The answer is a complicated phrase—”the law of diminishing marginal utility” —with a straightforward meaning. The greater the supply we have of something and the more we use it, the less we value it. We have oceans of water, pumped to many of us ceaselessly by the gallon. We have far fewer diamonds, hidden and embedded in rock. Their intrinsic value becomes secondary to the subjective value we assign them.

“Economists tell us that the law of diminishing marginal utility dictates that consumers place a greater value on diamonds than on life-giving water. It’s just the way consumers prioritize price—by a product’s ‘least-value usage,'” writes Goetz, explaining that the lowest value usage of water is to clean gutters and sewer systems. Meanwhile, “water may save your life in the desert, but even the lowliest of industrial diamonds carries a certain sexiness that invariably outstrips the redoubtable H2O.” She goes on to quote humorist P.J. O’Rourke: “‘With an additional eight ounces of water, all we get is a trip to the bathroom in the middle of the night. With an additional eight ounces of gold, we get the upfront payment to lease a Lexus. Marginal utility explains why gold, vital to the life of no one except hip-hop performers and fiancés, is so high-priced.'”

Yet, if Cape Town was now charging for water, its price per liter would be skyrocketing. As we plunge into a future of climate change and rapidly diminishing resources, it seems that many cities will soon be  reconsidering how much we value those resources we need the most.


JSTOR Citations

The paradox of value: Water rates and the law of diminishing marginal utility

By: Melanie K. Goetz

Journal (American Water Works Association), Vol. 105, No. 9 (September 2013), pp. 57-59

American Water Works Association

Farahnaz Mohammed is a nomadic journalist, based wherever there's an internet connection. Her writing has appeared in The Huffington Post, The Guardian, The Women's Media Center and others, and her work has been referenced by Quartz, The Washington Post and El Colombiano. Farah holds a Masters of Science in Journalism from Northwestern University and a Masters in Spanish and English Literature from The University of Edinburgh. You can find her on twitter @FarahColette, or at www.farahmohammed.com.

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