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hygiene, and agriculture. The marginal utility of subsequent units of water is thus much lower than that of the first several available units. Meanwhile, though the first diamond has less marginal utility than the first unit of water, diamonds are rarer to come by. Thus, their value reflects the more subjectively important ends to which diamonds can be devoted; the marginal utility of the first diamond to an economic actor is likely to far outstrip that of the 1000th gallon of water.

When considering the law of diminishing marginal utility for a given good, one must distinguish the good not by its material characteristics, but by the function which the economic actor sees it as capable of fulfilling. For example, it is perfectly plausible that Jim might be willing to expend $10 for his first tire, $20 for two tires, $25 for three tires, but $100 for four tires. Murray Rothbard, in his book Man, Economy, and State, claims that the tire qua individual material tire is not a good in itself, outside the purpose the acting individual attributes to it. If one is building a new car, a single tire will not suffice. Four tires, however, will be enough to fulfill the purpose of building the car. Jim might purchase one tire simply to let it sit in his garage while he hopes to accumulate the other three tires from other buyers. Or Jim might use the tire as a backup in the event his older car's tires expire. These uses for single tires are fundamentally different in kind from the use of the four-tire set in the creation of a new car. Thus, "one tire" is a fundamentally different good, in the Austrian sense, than a "set of four tires." It still follows that each subsequent set of four tires will have a lower marginal utility to Jim than each prior one. Furthermore, each individual tire prior to the acquisition of the set of four has a lower marginal utility to Jim than the tire preceding it.

The rigorously logical, ubiquitously observable, and universally applicable insights of Austrian Economics with regard to utility provide useful tools for analyzing human action in the economic sense. The Austrian view of marginal utility disposes with age-old paradoxes and allows for a framework of generalizations accommodating the entire diversity of individual valuations.

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