This “diamond-water paradox” is now explained in introductory economics
textbooks through the use of marginal utility theory. An additional unit of
water has a very low utility (value) to someone when it is already in plentiful
supply because the basic needs for which water is so essential for survival
have already been met. Diamonds are so valuable to people because they are
very scarce; their marginal utility is high because of their aesthetic beauty to
an owner, as well as the social status they may convey due to the fact that few
people have them.