Also known as the Diamond–Water paradox, the paradox of price describes the vast difference observed in the prices of some essential goods and non-essential goods. Many goods and services essential to human life have very low prices in a market economy compared to other goods and services that are not so essential. For example, water which is essential for human existence is sold at a price which is only a fraction of the price of diamond which is a luxury item which is not essential for human existence. The price paradox has also been used to describe the huge difference in salaries for essential workers such as nurses and farmers and others such as CEOs of companies, who are considered by many to be non-essential workers. This paradox has been cited by many critics of the market economy who argue that it is an unfair economic system that leads to inequality among different populations.
The paradox of value is often used to elaborate on the concept of marginal utility in discussions on the theory of value and how the use value of a commodity can differ significantly from its exchange value. Many economists have tried to explain the paradox. Some of them such as Adam Smith, a proponent of the labor theory of value, believed that the price paradox could be explained by differences in the amount of labor that produces a good or service. The marginal revolution in economics in the late 19th century, attributed to contributions by Austrian economist Karl Menger, English economist William Stanley Jevons, and French economist Léon Walras, completely changed the way economists explained the paradox of value. Changed. These economists, who followed the principle of marginalism, argued that the price or exchange value of goods and services is not determined by their simple use value. Instead, it is determined by their marginal use value (or utility) to the buyer. This is the most widely accepted resolution of the paradox of value among economists.
The most fascinating demonstration of the theory of marginal utility was presented by the Austrian economist Eugen von Bohm-Bawerk in his 1891 book “The Positive Theory of Capital”. He cited the example of a farmer who had a total of five sacks of corn to use until the next season. The farmer values the first two sacks of corn the most because they will serve as his food and help him survive the next season. He then plans to use three other sacks of corn for other purposes in descending order of importance, namely to feed his rooster, to make wine, and the last sack of corn to feed the parrot. who entertains him. Bohm-Bawerk explained that the price a farmer would be willing to pay for any sack of grain would depend on how much he valued feeding his parrots, which would have been least necessary for his desires. Is. He argued that it would not depend on how much value the farmer placed on his life, which was his most urgent desire. The farmer, in other words, would be willing to pay a very high price for a sack of corn when the supply of corn is severely limited by famine or other crises. Therefore, in terms of diamond and water prices, which are very different, it is the limited supply of diamonds that sells them at a much higher market price than water which is relatively more abundant in its availability.
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