Question

This question refers to the interaction of the idea of scarcity and diminishing marginal utility.   Please answer each component fully and completely.

a. There is a construct in Economics called the diamond water paradox.   It is based on the observation that diamonds are not essential for life but much more valuable than water which is essential for life.   The paradox relates the relative value of water to diamonds.   Can you explain the paradox?

b. There is a general debate in Economics about whether anything can really be available for free.   Can you identify any goods or services in the economy that are available for free?   For something to be available for free, one criteria to use is that more is available than people want, even at a zero price.   You can use that criteria or another one of your choosing.

Answer 1

a) Diamond water paradox is based on the concept that though water is essential to life and for survival still diamond is valued more in terms of money because the marginal utility of water is high for the initial few units and after that, it decreases and for diamond which scarce, marginal utility is higher comparatively. Adam Smith theory resolves the paradox.

b) Public goods can be available for free by taking advantage of free riding.i.e. the good is available to everyone if a few numbers of people are ready to pay the opportunity cost of making the good available. For example, Education is a public good where some portion is contributed by the government in order to make it available to even the poorest section of the society in order to increase literacy and social welfare.