Venezuela's Non-Paradox of Value

While U.S. drivers cope with $3.00 a gallon gas prices, people in Venezuela are paying only $2.30. No, not $2.30 a gallon--$2.30 to fill a 19-gallon gas tank.

At 12 cents a gallon, Venezuela has the cheapest gas in the world thanks to government subsidies and President Hugo Chavez's vow to keep gas prices low. In fact, gas in Venezuela is cheaper than mineral water, a seeming violation of the Paradox of Value. The paradox describes the contradiction existing when many goods needed to sustain life have little economic value, while luxury items unnecessary for survival have very high economic values.

The classic illustration of this paradox is the disparity between the value of diamonds and water. Compared to diamonds, water is nearly worthless, yet you cannot survive without it. Meanwhile, diamonds have only aesthetic value and represent conspicuous consumption. In other words, water has high “use” value and low economic value, while diamonds have low use value and high economic value.

1. How does the paradox of value pertaining to water and petroleum hold elsewhere in the world, but not in Venezuela?

2. How does the scarcity question factor into the paradox of value?

3. Where else can the paradox of value be seen? (Hint: Think about the labor market.)

4. If Venezuela were to lift subsidies and let gas prices rise to a market-determined level, what economic and social effects could this have in Venezuela?

Topics: Paradox of value, Scarcity, Marginal utility, Subsidies