Question

Diamonds costing more than water is a failure of the market. why?

Diamonds costing more than water is a failure of the market. why?

Homework Answers

Answer #1

Adam smith, the father of economics, explained that value of use is. different from value of exchange.  

Smith then followed the labour theory of value in which believed  that diamond are more costly as compared to water as it was very difficult to bring diamonds into the market. But the labour theory too can explained with surety about the value of diamonds and water as it does not explain the price of items.

There was failure in the subjective value as well. The subjective value can tell you that diamonds are more costly than water but it cannot explain you the reason behind it. Mainly the economics conclusions are made by following marginal benefit than total benefit.

People do not compare the between all the diamonds in the world with all the water in the world. Diamond can be costly than water when compared on the basis of price. But water is more valuable for. people living in the water.

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