Tariff Escalation and Invasive Species Risk

is the price response of import demand in absolute value, and the smaller is the export expansion
as a result of the lower tariff factor τI . Given the assumptions we made on the supply of the raw
input and the technology of the processed good, it is easy to show that if the final good tariff
factor falls twice as fast as the raw-input tariff factor then the condition is satisfied.⁵

3.3. Extensions

IS associated with both imported input and imported processed good

Suppose that the frequency of occurrence associated with imported processed good is z_IFG per
unit, assumed negligible in the previous sections. We assume that z_IFG < z_I to reflect the fact that
input is much more likely to transfer risks into a country than processed goods are. Suppose the
effects of z_I and z_IFG on the economy translate into an increase in the cost of production MCD of
the domestic input D as

p =MC =αD +z I +z IFG .
DD   IIFG

First, we describe the initial equilibrium with tariff escalation. Denote this equilibrium by
a superscript (^e). The equilibrium levels of FG^e , DFG^e , IFG^e, and DI^e remain the same as
those in the initial equilibrium (*) in the situation with absence of invasive species risks
associated with imported processed good. Since P_D=τ_I=αD^e+z_II^e+z_IFGIFG^e, and

D^e+I^e=DI^e, we solve for D^e and I^e :

τ_I
^θτIFG

zK τ^θ-1

α - zI θτIF_r
IIFG

⁵1+ [τ₁ (1-θ)∕(αDI))] = 1+ (1- θ) (Dⁿⁿ∕DI)*1, with Dⁿebeing the prevailing level of domestic supply D with no IS
externality (β=0), the own-price elasticity of D^ne= 1, and D^ne/DI < 1.

15

<<   13   14   15   16   17   18   19   >>

More intriguing information