Ecological economics, Economics, Ecosystems, System theory
We provide a system dynamics implementation of a dynamic ecological economics model. Dynamic economic models are often constrained to use functions, such as the Cobb-Douglas function, chosen “conveniently” to allow for analytic solutions. The C-D function, however, suffers from its fixed elasticity that does not allow for the substitutability between man-made capital and natural capital to change, which is vital for economic sustainability. Using system dynamics removes this constraint and enables more realistic ecological economics models containing functions not amenable to analytic solution. The base model is the natural resource and population growth model developed by Brander and Taylor (1998) that employs a Lotka-Volterra type structure and strictly follows economic theory in all aspects of its formulation. To make the model more realistic and to enable the consideration of critical environmental issues, we discuss and employ model extensions inspired by modern economics theory. One extension is to use a CES production function with a dynamic substitutability parameter that enables the study of long-term sustainability of the modeled economy. The model does not have an analytic solution, necessitating a simulation approach. Importantly, under certain conditions the system dynamics implementation robustly returns to equilibrium after disturbances.
Uehara, Takuro; Nagase, Yoko; and Wakeland, Wayne, "System Dynamics Implementation of an Extended Brander and Taylor-like Easter Island Model" (2010). Systems Science Faculty Publications and Presentations. 77.