Demand and Supply The Diamond Water Paradox

What determines a person's salary? Why do professional athletes make so much money? People who work as firefighters, police officers or teachers are clearly more important to our society, yet they make much less money than jocks. What explains this?

diamond-water paradox Economists have long been fascinated by the diamond-water paradox. The question raised by this paradox is why water, a substance needed to sustain human life, is generally worth less than diamonds, a product that adds no real value to mankind.

This same question could be posed about professional athletes' salaries. How can athletes' salaries be so high when salaries for other occupations, that are clearly more important, are so much lower?

The prices of goods are set in a market. Because diamonds are a scarce natural resource, they command a high price. The salaries of workers are also set in a market, and professional athletes are a scarce resource in high. In particular, superstar athletes are a very scarce resource.

An NFL quarterback like Brett Favre—named Most Valuable Player three times to date—is one of only a few people in the world that can perform his job well and he therefore is rewarded with a salary approaching $8.5 million per year.

Professional athletes make high salaries because people with their skills are scarce. The demand and supply for people in various occupations determines the salaries in question—not the “importance” of the job to society. This finding is similar to the finding that diamonds are very expensive (while useless in a practical sense) yet water is very cheap (but life sustaining).

On the other hand, what will happen when clean water becomes more scarce?