The Economics of Shallow Lakes

Ecological systems such as shallow lakes are usually non-linear and display discontinuities and hysteresis in their behaviour. These systems often also provide conflicting services as a resource and a waste sink. This implies that the economic analysis of these systems requires to solve a non-standard optimal control problem or, in case of a common property resource, a non-standard differential game. This paper provides the optimal management solution and the open-loop Nash equilibrium for a dynamic economic analysis of the model for a shallow lake. It also investigates whether it is possible to induce optimal management in case of common use of the lake, by means of a tax. Finally, some remarks are made on the feedback Nash equilibrium.