Tariff Escalation and Invasive Species Risk

of consumer surplus, producer surplus and tariff revenue increases as the tariff on the final good
falls. Therefore, total welfare, which is the sum of welfare in the final-good and input markets

increases after reforms. _h

take the log differential of IFG and DI with respect to the natural logarithm of the tariff factor

τIFG, which leads to

These expressions are substituted into the inequality

dln IFG/ dln τ  IFG

IFG
dln DI/ dln τ   DI

IFG
therefore

dlnIFG/dln τ  IFG

IFG
---<
dln DI/ dln τ DI
IFG
which after simplification leads to

^tifg ^zi > 1 ₊ γ(1 - θ)
.
^τI ^zIFG       ^sDFG^θ

This sufficient condition for welfare improvement is expressed locally in terms of
underlying parameters, where (-γ) and (θ/(ɪ-θ)) are the own-price elasticity of demand and
domestic supply of the final good, and sDFG is the share of the final good consumption sourced
domestically (DFG/FG). This local condition is intuitive. As demand elasticity gets smaller in
absolute value (lower γ), the expansion of FG and IFG induced by the lower tariff is moderated.
As parameter θ gets larger, the decrease of the derived demand for DI induced by the lower tariff
gets larger in absolute value, and so does the decrease in I and its IS externality. A large share

19

<<   17   18   19   20   21   22   23   >>

More intriguing information