Rangeland in the arid zone of Western Australia has been degraded by sheep overstocking since the turn of the century. The Strategies available for restoring the productivity of such degraded rangelands are limited. In this paper optimal economic policies with respect to the choice of stocking rates and grazing patterns were derived for various starting states under a stochastic optimal control framework. Evaluation of these optimal policies was carries out by comparing their long run economic and ecological impacts on grassland with ungrazed conditions. All optimal policies call for a stnttegy of set stocking or destocking only. Rotational grazing is not economically viable at the specified cost levels. Optimal stocking rate increases with the level of forage biomass and adult plants, but decreases with the level of either young or old seedlings at the degraded nmge condition. The results indicate that under the criterion of maximisation of the long run average return, for slightly degraded range, rehabilitation through grazing management alone is possible. For· range which is modcrntely to severely degraded, rehabilitation to fair or good condition is not technically practical. On the other hand, under the criterion of maximisation of the net present value at a discount rate of 6 percent, the consequence of the long run impact on the range resource following the optimal policy is ecologically unsustainable, though economically viable. These findings suggest that if degraded ranges continue to be exploited for private profit, the range rcsom·ce may be driven beyond its capability to renew. If ecological sustainability is an Australinn social norm, economic rationality should subside in the decision criterion, and range management will require some willingness to forego short term profits for the sake of long term rewards or investment in regeneration measures.