In a changing environment, small RNAs (sRNAs) play an important role in the post-transcriptional regulation of gene expression and can vary in abundance depending on the conditions experienced by an individual (phenotypic plasticity) and its parents (non-genetic inheritance). Many sRNAs are unusual in that they can be produced in two ways, either using genomic DNA as the template (primary sRNAs) or existing sRNAs as the template (secondary sRNAs). Thus, organisms can evolve rapid plastic responses to their current environment by adjusting the amplification rate of sRNA templates. sRNA levels can also be transmitted transgenerationally by the direct transfer of either sRNAs or the proteins involved in amplification. Theory is needed to describe the selective forces acting on sRNA levels, accounting for the dual nature of sRNAs as regulatory elements and templates for amplification and for the potential to transmit sRNAs and their amplification agents to offspring. Here, we develop a model to study the dynamics of sRNA production and inheritance in a fluctuating environment. We tested the selective advantage of mutants capable of sRNA-mediated phenotypic plasticity within resident populations with fixed levels of sRNA transcription. Even when the resident was allowed to evolve an optimal constant rate of sRNA production, plastic amplification rates capable of responding to environmental conditions were favored. Mechanisms allowing sRNA transcripts or amplification agents to be inherited were favored primarily when parents and offspring face similar environments and when selection acts before the optimal level of sRNA can be reached within the organism. Our study provides a clear set of testable predictions for the evolution of sRNA-related mechanisms of phenotypic plasticity and transgenerational inheritance.