Dynamic Optimization, Natural Capital, and Ecosystem Services

This article argues that natural capital should be viewed as a stock or state variable whose evolution is described by a difference or differential equation. Ecosystem services are benefit flows produced by stocks of natural capital. To value natural capital and the ecosystem services they provide, one needs to determine their value when they are optimally managed. This requires solving a dynamic optimization problem. The steady-state optimum to such a problem can serve as a benchmark from which to estimate the losses associated with pure open access (the tragedy of the commons) or any other sub-optimal steady state. This approach is illustrated by estimating the ecosystem service from oysters that remove nutrients from Chesapeake Bay.