Waiahole Ditch and Transaction Cost

As part of my Direct Readings this semester, I was asked by Prof Grandy to analyze the issue of Waiahole Ditch through the lenses of transaction costs.

The debate is over water use.

On the one hand, Windward organizations demand more water to be allocated to the Windward direction to promote i) steam restoration ii) environment protection iii) native Hawaiian culture iv) gathering rights v) recharging Kaneohe Bay fishery vi) survival of taro farming Windward valleys. A commission was created to defend this group: Waiahole-Waikane Community Association.

On the other, Central Oahu farmers as well as Estate companies have claimed that if water stops flowing to Leeward, they can no longer diversify their agriculture.

There is a third party involved. State and Hawaiian groups have argued that some of Kahaka Valley water has to be stored for future needs.

In this juridical battle that erupted in 1995 after Oahu Sugar Co. closed operations on Oahu, State Water Commission and Hawaiian courts have delivered some rulings. In 1997 and 2001 the Commission decided that the ditch should allocate some water back to the Windward side. Hawaii Supreme Court overturned part of these decisions. In 2006 it was decided that 12.57 million gallons would go to Central Oahu, 12 million to Windward streams, and 2.3 millions reserved in case water-use needs arise.

Waiahole-Waikane Community Association demands that all Waiahole ditch water be allocated back to the Windward streams.

Amidst this juridical battle, what would Coase and his Transaction Costs theory say?

Windward, Leeward, and State/Hawaiian organizations should be able to come up with numbers revealing how much they would lose or gain from having more or less water. Once these numbers are on the negotiation table, litigants would have a clear picture of the economic outputs and outcomes of each part in case water is reduced or increased to either side.

Assuming that more water flowing to the Windward direction yield more economic benefits than all Leeward farms together are able to compete, then Windward leaders should provide financial compensations to Leeward residents and farmers to offset possible losses resulting from less water flowing to the Leeward side.

Leeward residents could then invest this money in businesses less dependent on water or new devices that would improve efficiency in their farms by reducing water waste - or even prospect more water.

Three main problems, though, arises for this negotiation to start and be successful:

i) Value accuracy;
ii) Leeward’s lack of leadership;
iii) Power of State and Hawaiian organizations;
iv) Cultural and environmental valuing process.

If litigants address these economic, organizational, political, and cultural issues, they should then tap into arbitration where free price mechanisms and not expensive court rulings would drive parties involved in the litigation to reach a consensual decision by allocating scarce resources as efficiently as possible and making everyone better off.