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My Review on the Water-Diamond Paradox
The water-diamond paradox, which was set forth by John Law(1704), and made famous by Adam Smith(1776), indicates that, water is useful to humans,''t b diamonds are useless to humans, thus water should have a higher "use value" or "utility" than diamonds do.To solve the paradox, in my opinion, we can resort to either classical theories or neo-classical ones. From the classical economists'' perspective, Utility can also be related to desire rather than usefulness, thus diamonds still thve utility since they are desired, and in the short run, scarcity may play an important role in the determination of price, therefore , it won''t be to difficult to imagine the higher price of diamonds since they are so rare.On the other hand, in the long run, neither utility nor rarity have a role in the determination of natural prices in the Classical schema. The high diamond price may have something to do with the long-run demand-and-supply mechenism, which suggests the demand of diamonds exceeds the supply of them to so large an extent, or the cost of production doctrine, which indicates that it is too expensive to produce a large amount of diamonds.However, it is only half of the story, the Neo-Classicals(or rather the Marginlists) may provide an alternative appoarch to this paradox----the marginal utility theory, or more pecisely the diminishing marginal utility.First of all, I would like to review the two types of utilities, the objective utility and the sbjective utility, which are related to objective-determined rarity and subjective-determined rarity respectively. It is evident, we can not survive without water, the objective utility of water is high while the subjective utility of it may be low since there is so much water around us. If some day in future, we are running out of water(particularly clean water), wthe subjective utility of it may be as high as the diamonds, imaging you are in the desert, thirsty under the burning sun, what would you choose, diamonds or water?
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