Water Price Prediction for Increasing Market Efficiency Using Random Forest Regression: A Case Study in the Western United States

Ziyao Xu,Hoi Yi Chan,Kaixun Hua,Jijian Lian,Kui Xu,Lingling Bin

doi:10.3390/w11020228

Abstract

The existence of water markets establishes water prices, promoting trading of water from low- to high-valued uses. However, market participants can face uncertainty when asking and offering prices because water rights are heterogeneous, resulting in inefficiency of the market. This paper proposes three random forest regression models (RFR) to predict water price in the western United States: a full variable set model and two reduced ones with optimal numbers of variables using a backward variable elimination (BVE) approach. Transactions of 12 semiarid states, from 1987 to 2009, and a dataset containing various predictors, were assembled. Multiple replications of k-fold cross-validation were applied to assess the model performance and their generalizability was tested on unused data. The importance of price influencing factors was then analyzed based on two plausible variable importance rankings. Results show that the RFR models have good predictive power for water price. They outperform a baseline model without leading to overfitting. Also, the higher degree of accuracy of the reduced models is insignificant, reflecting the robustness of RFR to including lower informative variables. This study suggests that, due to its ability to automatically learn from and make predictions on data, RFR-based models can aid water market participants in making more efficient decisions.

Highlights

Water crises, as a consequence of ever growing water demand and climate change, are recognized as a major global challenge
The results showed that the random forest regression models (RFR) models had good predictive capabilities for water rights prediction, can be used to help water market participants in making more efficiency decisions
Uncertainty of asking and offering prices due to the complex relationship between water price and its associated influencing factors is a major obstacle for participants in making efficient decisions

Summary

Introduction

As a consequence of ever growing water demand and climate change, are recognized as a major global challenge. Recognition of this challenge has led to increasing adoption of water markets in many of the world’s arid and semiarid regions to facilitate water transfer across competing demand [1]. The existence of water markets provides water users with clear price signals and opportunity costs that potentially enhance the economic efficiency of water use [2,3]. In a perfectly competitive market, price acts to equalize the marginal benefits from water use across users while maximizing social welfare [4].

Methods

Results

Conclusion