Health Economics | Dentistry
The Diamonds-Water Paradox and Healthcare
Why increasing availability of healthcare can lead to devaluing its benefits.
What is valuable?
How do we place value on health care? On dental care? On dental implants, for example? Simply, we don’t. It depends on how much of the service or how much of the product is used. Dental implants elucidate this principle, and can be applied to many aspects of healthcare.
What is the Diamonds-Water Paradox?
Adam Smith, despite being one of the most renowned figures in modern economics, could not fathom why water — a valuable necessity for human life — cost so little compared to diamonds, which were purely decorative.
Our simple model of inverse demand can illustrate this nicely below.
Imagine you’re dehydrated. That first glass of water is very valuable. The second is worth less, and the third worth less, further still. Now thinking more realistically, water is abundant in most of the world so that it’s available to pretty much everyone. It’s hard to think of people having to pay more than a few cents for a glass of water. This is represented by the area under the curve above: the total benefit. This is large in comparison to the area under the curve for diamonds. The value of one more glass of water is very small: hence the marginal benefit, and cost is small.
Now take diamonds. They are scarce and are expensive. Diamonds don’t save lives in the desert, but they are rare enough that the marginal benefit from obtaining one extra is very high, which is reflected in the price.
The importance of the marginal
Essentially we’re talking about the ‘one more’ unit or service provided: what it costs and how much revenue it generates. This arises because the costs of production do not remain constant.
The cost of producing one more unit of product (or providing an additional service) is the marginal…