Tariff Escalation and Invasive Species Risk

Parameter z_I is assumed to be small enough such that α> z_I . This leads to a condition for both

domestic and imported input to be positive as follows:

zDI^e<τ-z IFG^e<αDI^e,

IIIFG

where DI^e = DI * and IFG^e = IFG* as specified in the previous section. The latter condition
defines some relation between tariff factors, frequency of occurrence, and cost parameters.

As in the previous case in section 3.2, the crux of the welfare analysis lies in the input
market, as allocative efficiency increases unambiguously in the output market. The surplus from
the derived demand DI can be measured in terms of the DFG producer surplus by integrability
and can be abstracted from. Hence, welfare consequences in the input market hinge on the
producer surplus for input D and the deadweight loss associated with the DI derived demand:

IFG^e]- ∫/^lDId(τ,τFG)dτ-DI^e

How does the equilibrium look after the reform? We now reduce the tariff escalation by
reducing t_IFG to t_I^N_FG < t_IFG and keeping t_I constant. Denote the new equilibrium by a superscript
(^ee). The equilibrium levels of FG^ee , DFG^ee , IFG ^ee , and DI^ee remain the same as those in the
initial equilibrium (**) in the situation with absence of invasive species risks associated with
imported processed good.

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