Water is absolutely essential for life, but a glass of water costs practically nothing. Diamonds are not essential, but are expensive. Economists call this the diamond-water paradox, and use it to illustrate the idea of marginality. The solution to the paradox is that we don't pay attention to the total value of something, just the cost of obtaining one more unit. It costs (almost) nothing to pour a glass of water, so we pay (almost) nothing. Marginality is surprisingly practical. We all understand that exercising is valuable. But when you come home and are tired, what is the cost to you of skipping just one session at the gym? Practically nothing, and so you skip it. What is the way around that? You apply a cost to each session. (In economese: a marginal cost) You can tell yourself, "No dinner until I work out." You can join a team, who would call you and be angry if you missed a session. (Or you could find a way to enjoy exercise, but that is off topic.) Addicts understand that their addiction is killing them. But what is the cost of just one more drink? It can't hurt, right? Software is valuable. But what is the cost of ("illegally") downloading software? Practically zero. Bill Gates famously spent more money encrypting copies of Microsoft products than on developing the products themselves. Why? To apply a marginal (per unit) cost. We all understand, for example, that high school English is valuable. In it you learn to think critically and write clearly and build the foundation for a good, productive life. But what is the cost to a student of missing one day of class? Or even one week of class? While the value of high school English is very high, the marginal value seems to be pretty low. How can that change? (picture credit: ayswaryak)
1 Comment
Jonathan Angelilli
11/1/2013 08:50:53 am
Nice post! Love that paradox, never heard of it but makes a lot of sense.
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AuthorI'm an entrepreneur and I teach math, history, economics, and fitness. I'm looking for arguments. Archives
November 2019
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