Tariff Escalation and Invasive Species Risk



IFG**=τN -γ

IFG


τI


θτN


IFG


θ
θ
-1


(10)


DI**=


τι

Θtn

τIFG

(11)


τ

D**=   I


α-zI


z1K
α
-zI


τI

θτN
τ
IFG


θ-1


and


(12)


1

αK    τ θ-1    τ

I ** = α----τ

(13)


α - z1 L θτ'NG J     α - z1

By using θ<1,γ>0,τINFGτIFG and comparing directly the equilibrium levels before and
after reforms, we get the following lemma.

Lemma 1: Under assumptions of sections 3.1 and 3.2., a reduction in tariff escalation through a
decrease in the tariff on the imported processed good and holding the tariff on imported raw
input constant, has the following impacts:

(i) total final good consumed increases, domestic final good consumed decreases, and imported
final good consumed increases;

(ii) total raw input used decreases, domestic input used increases, and imported input used
decreases.

Lemma 1 is illustrated in figure 1. The policy shock is shown in figure 1a, which induces a shift
of the derived demand
DI to the left in figure 1.b, a resulting decrease in imports of the input,
and associated externality. The latter induces a shift of the domestic supply of the input
D to the
right.

To compare total welfare before and after reforms, we decompose welfare in terms of
elements in final-good and input markets. First, welfare in the final-good market, the sum of



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