Tariff Escalation and Invasive Species Risk

^τι

Θtⁿ

^τIFG

1

αK    τ ^θ-1    τ

I ** = ^α----^τ

α - z₁ L θτ'NG J     α - z₁

By using θ<1,γ>0,τ_I^N_FG < τ_IFG 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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