Why liquidity matters
To continue the analogy, consider that a highly desirable property came up on Island C, and investors in Island A and Island B wanted to buy it and finance the purchase by selling their existing property. Property owners on Island A could buy it quicker because they operate in a more liquid market, while property owners on Island B might need to cut their prices dramatically to get a quick sale.
The liquidity premium also applies to equities. For example, consider two companies operating in similar industries but with substantial liquidity differences in their shares.