Water is essential to the survival of the 7 billion people that our planet tries to sustain. Diamonds are mere luxuries. It therefore seems perplexing that the price of water is so low, whilst diamonds, with limited practical use, sell for substantially higher prices.
Attention was brought to this diamond-water paradox with Adam Smith’s observation that, ‘nothing is more useful than water; but it will purchase scarce anything; scarce anything can be had in exchange for it.’ He drew the distinction between ‘value in exchange’ and ‘value in use’, however, this topic had long been debated prior to him. For Plato mentioned in Euthydemus that, ‘only what is rare is valuable; and ‘water’, which … is the ‘best of all things’, is also the cheapest.’[1] These great thinkers understood that market prices do not reflect the total utility that goods bring. Whilst prices change with changing times, the essential properties of goods such as water do not. It is this comparison between practical value and monetary value that Aristotle has also concerned himself with when he mentioned, ‘of everything which we possess there are two uses … one is the proper, and the other the improper or secondary use of it.’[2]
Economists Jules Dupuit and Alfred Marshall have since explained this apparent paradox with the concept of marginal utility. They suggested that it is the additional satisfaction that a consumer gains from an extra unit of the good that determines the price, rather than the total utility of the good[3]. Despite water having a diverse array of uses, an additional unit of water would generally provide little extra satisfaction. In contrast, for generations people have valued diamonds highly for their perceived beauty and rarity, which means that the marginal utility for diamonds is significantly higher.
However, it still may seem unclear as to why the prices of water are so low compared to other goods that are deemed essential to survival, such as food, clothing and fuel. This can be explained by the influence governments have on the supply of water. There are significant economies of scale to be gained in water storage, whilst the distribution of it requires a high degree of coordination. These naturally give rise to single providers with monopoly power who can afford the high fixed costs associated with the necessary capital and infrastructure. As governments consider water supply to be of great importance, they frequently subsidise or are involved in the direct provision of it. The price of water therefore remains low, not due to the abundance of water or lack of demand but instead due to political involvement.
This has in turn created problems of its own. Water scarcity is an escalating issue for today’s society. Subsidized water is one method of opening access to water, but it arguably encourages over exploitation of this precious resource. Baumann and Boland stated that ‘water is no different from any other economic goods.[4]’ Perhaps it would be favourable to treat water in this way and thereby institute a market in which its price is determined by its marginal utility. The rationing effect of price may help to curb excessive consumption to a more sustainable level.
Yet there are significant ethical and practical difficulties in instituting such a mechanism. Some have argued that water, ‘must not be treated as a private commodity to be bought, sold, and traded for profit.’[5] This reflects a widely held view that access to clean water is a universal human right. 1.1 billion people still lack access to it[6] and a pricing strategy would be highly unlikely to resolve this. In addition, the very nature of water means that it is highly difficult to distribute evenly – it cannot simply be moved from areas of surplus to areas of shortage.
Ultimately, collective action is needed but the direction of it is unclear. The market for water must meet many conflicting conditions: accessible without overexploitation, an affordable price without compromised quality. The repercussions of poor water quality can be devastating as diseases spread, people die and the economies of entire nations suffer. The practical value of water and the market value of diamonds thus becomes incomparable as they are defined in entirely different terms. What is certain though is that measures must be taken to manage sustainable consumption of water as a crucial resource.
[1] The Complete Plato Plato Booklassic, 29 Jun 2015 euthydemus
[2] Politics By Aristotle Written 350 B.C.E Translated by Benjamin Jowett http://classics.mit.edu/Aristotle/politics.1.one.html
[3] Cf Water Crisis: Myth or Reality? edited by Peter P. Rogers, M. Ramón Llamas, Luis Martinez Cortina
[4] Urban Water Demand Management and Planning 1998 Boland and Baumann
[5] Barlow and Clarke 2002
[6] http://www.worldwildlife.org/threats/water-scarcity
Image from: https://en.wikipedia.org/wiki/Paradox_of_value
