Abstract
Human well-being depends to a large extent on services provided by ecological systems. In poor countries, this dependence is more transparent than in industrialised countries where the dependence is more indirect. Effective management of these systems requires a good understanding of their properties and in particular a knowledge of the dynamics of the systems.In the article, the dynamics of one “simple” system is analysed economically. The system is a lake and the interaction between the run-off of nutrients into the lake and the growth of either algae (eutrophication in lakes in northern Europe and North America) or water hyacinths (in lakes in southern and eastern Sfrica) is studied. It turns out that the dynamics exhibit bifurcation points so that there are two basins of attraction. If the system flips to one basin and it is regarded desirable to return to the other basin, there will be hysteresis. Assuming that there are different users of the lake, a differential game is constructed that captures the strategic interests of the users. The resulting equilibrium shows first the conventional negative externality that will force the system to a different basin od attraction. Finally, we investigate the use of a tax for bringing back the system to a Pareto optimum.