improvement since IS risk decreases with a reduction of tariff escalation. Since a reduction in
tariff escalation has ambiguous impacts on changes in the distribution of imported inputs and
domestic input use, we then focus on sufficient conditions that guarantee that the externality
from IS is not exacerbated by the reform but rather reduced.
Welfare in input market, except the transferable DI consumer surplus, is the D producer
surplus subtracted by the deadweight loss associated with the DI demand:
W = 05Dee [τ, - z,I" -zFG
IFGee]- ∫ D,(τ,τ,ra)dτ-DIe
= 0.5D[τ, -z,l" -ZmIFCGe]-KθτI)
1 θ 1 θ θ /(θ-ɪ),-ɪ/(θ-1)
---τ, + τ,
θθI I
(22).
Proposition 3: Under assumptions of sections 3.1. and 3.3., reducing tariff escalation by
reducing the tariff on the imported final good and keeping the tariff on imported raw input
zI
constant increases total welfare and reduces invasive species risks if I >
zIFG
IFGee
- IFGe
DIe-DIee
z IFGee - IFGe
Proofs: By lemma 2(ii), —— >-----------means that l < l and D > D .
zIFG DIe-DIee
Moreover, given that Iee < Ie , we have
IFGee
-IFGe
DIe-DIee
IFGee -IFGe
>------------. Hence
Ie-Iee
zI IFGee -IFGe
—— >-------
eee
zIFG I-I
or zIee +z IFGee <zIe +z IFGe . This proves that the invasive
IIFG IIFG
species reduce. It also proves, together with Dee > De that the D producer surplus increases:
0.5D [τ1 - (z1lee + zJFolFGee)] > 0.5De [T - (zJe + ziFθlFGe)].
II IFG II IFG
Comparing deadweight loss associated with demand of DI, since τN <τ and θ< 1 we get that
lFG lFG
DWLeDeld < DWLeDld. We also know that welfare in the final good market only, which is the sum
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