Paradox of value

The philosopher Adam Smith is often considered to be the classic presenter of this paradox, although it had already appeared as early as Plato's Euthydemus.

In a passage of An Inquiry into the Nature and Causes of the Wealth of Nations, Smith discusses the concepts of value in use and value in exchange, and observes how they tend to differ.

He writes: What are the rules which men naturally observe in exchanging them [goods] for money or for one another, I shall now proceed to examine.

A diamond, on the contrary, has scarcely any use-value; but a very great quantity of other goods may frequently be had in exchange for it.

Thus, if someone possesses a good, they will use it to satisfy some need or want, starting with the one that takes highest priority.

Eugen von Böhm-Bawerk illustrated this with the example of a farmer having five sacks of grain.

If one of those bags is stolen, he will not reduce each of those activities by one-fifth; instead, he will stop feeding the pigeons.

Water is a commodity that is essential to life. In the paradox of value, it is a contradiction that it is cheaper than diamonds, despite diamonds not having such an importance to life.
At low levels of consumption, water has a much higher marginal utility than diamonds and thus is more valuable. People usually consume water at much higher levels than they do diamonds and thus the marginal utility and price of water are lower than that of diamonds.