What factor drives the high willingness to pay for diamonds according to the diamond water paradox?

The diamond-water paradox illustrates a significant principle in economics: the difference between total utility and marginal utility. In this context, diamonds are considered a luxury good that is both rare and highly valued, leading to a higher willingness to pay.

The rarity of diamonds contributes to their perceived value, as the limited supply creates exclusivity. People view diamonds as symbols of status, beauty, and wealth, which enhances their marginal benefit compared to necessities like water. While water is essential for survival and abundant in most locations, its high availability means that its marginal utility is relatively low.

In contrast, diamonds are not a necessity, but their scarcity and the social significance attached to them make their marginal benefit substantial. This combination of rarity and perceived value drives consumers to be willing to pay a premium for diamonds, despite the fact that they do not fulfill fundamental needs for health or wellness. The willingness to pay for diamonds is heavily influenced by these factors rather than their practical applications or production costs.