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Water – Is it a “diamond in the rough?”

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The diamond-water paradox has been long debated by economists probably since the early 1800’s.  In terms of economics, water is much more valuable and essential since life requires water for our survival (humans are approximately 75% water).  It’s easy to understand very quickly the importance of water to life on earth, yet the price we pay for water in Canada remains relatively low for its true value.   Diamonds on the on the other hand if we compare, are stunningly beautiful, much less essential, and yet the price we put on diamonds is substantially much higher. One could suggest the “utility” gained from water is great, but the “utility” gained from diamonds is much less.

The common phrase, “a diamond in the rough” relates to the idea that something has a hidden or exceptional characteristics and/or a future potential, but currently lacks the final touches of making it truly stand out from the crowd (Urban Dictionary, 2014).

Since diamonds in their natural form are quite ordinary and dull and its not until their true beauty is revealed by being polished and cut that we put a higher value on them.  Could the same be true for water?  Some waters are dull, clear, and have no shine, but does the true value in water lie in treatment once water has been deemed its safe to drink, or in abundance in the abundance of it?

Water as we value it may seem ordinary and even dull to some but if we give it a few more years, will it be a diamond in the rough?  There’s a number of environmental buzzwords currently that relate to water like sustainability, resilience, climate change, greenhouse gases, etc., all which have the potential to impact water and its value in some form.  How does one put a value on water?  And how will we value it in twenty years?

The concept of bottled water tends to complicate the water-diamond paradox since buying water in bottles is relatively cheap.  And if one were to buy more bottled water, would they be happier?  So what is the true value of water?

Marginal Utility vs. Total Utility

Perhaps the solution lies with the economic use and definition of utility and which utility is deemed more important.  Total utility refers to the over satisfaction obtained from consuming a good.  Whereas marginal utility refers to the extra (incremental) satisfaction that one wants or needs to obtain from consuming an additional unit in need for the good for example such as buying an extra bottle of water.

Canadians tend to place a high level of total utility on water since water is plentiful and EVERYWHERE.  In terms of marginal utility and water, it is typically low because if we purchase an extra bottle (or unit) most of us are typically not that much happier, unless we are really thirsty.  But what if we lived in the dessert or water wasn’t plentiful?  Would we think different or persuade our values?

And on the other side of the coin, many Canadians spend much of their lives without receiving satisfaction from a having a diamond so the total utility generated by diamonds is limited because they are not as plentiful as water.  But give the option to most women of choosing between having another bottle of water or having another diamond.  The diamond would win, and probably make them much happier at least for the moment.

So lets add in the idea of demand price to marginal utility.  Currently the price for water is marginally low because the marginal utility is low, and the price for diamonds is high because the marginal utility is high.  Meaning that most are willing to pay a higher price for something because it will simply bring them more satisfaction.  Does marginal utility determine the demand price? 

More Diamonds Than Water

Imagine an era of having an abundance of diamonds.  What if there were more diamonds than water and due to climate change or other environmental factors. We therefore would have a limited amount of clean fresh drinking water?  Would we be willing to pay more for water to make us happy?  And would we value it more in terms of protecting the resource or value it based on quantity vs. the quality? 

So my big question is will water be a diamond in the rough for the future?  Most of us see water as ordinary and dull right now, but in a few more years with added pressure from increasing climate change or natural hazards, will we see the true beauty and importance of water?  And how should it be valued?

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Diana Tyner (M.Sc.) is an environmental advisor, water guru, and certified CSA greenhouse gas quantifier.  She works with Canadian business, government, and non-profits to advance, science, agriculture, and economics.  Read more article by Diana published on dianatyner.wordpress.com

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