> The material worth of something is what someone will pay you for it, i.e. the value it would sell for at auction.

The problem is that this i.e. isn't right, because the vast majority of market transactions are not auctions. The value a pallet of rice would auction for is very different than the value a rice farmer would accept to load it onto a truck, which is very different than the value a supermarket would pay to get one a month deposited in its loading dock, which is very different than the sum of values individual consumers would pay for the bags on that pallet.

That's because those are all different products. Water in the desert is a different product than water at the river and they can still differ in value even in a competitive market because of the cost of transportation.

I think that's a very reasonable way to look at it. But it still means that the auction strategy doesn't always work, because water flowing to me is a different product than water flowing to the auction winner.

Those are differences in the buyer/seller rather than differences in the product. It's why people value something differently, not why something is a different product. Even if the water is in the desert in both cases, you might still value it less than someone else, e.g. because you already have some and they don't, but that isn't a difference in the thing being sold.