Tariff Escalation and Invasive Species Risk

occurrence associated with imported input is z_I per unit, and imported output does not bring any
risk. Consistent with many cases of IS, suppose the effects of z_I on the economy translate into an
increase in the cost of production of the domestic input D. The total cost function is written as

TC_D =FC+0.5αD²+βD,

where β = z_II reflects the IS externality associated with imports. The marginal cost is

MC_D = αD + β.

Profit maximizing behavior of D producer leads to marginal cost pricing behavior, which defines
the supply of input D

P_D = αD+ β.

Since DFG and IFG are homogenous commodities, in equilibrium, they face the same price in

1
domestic market:

=P=P=WP(1+t) =τ

DFG ⁼IFG ⁼FG ⁼IFG ⁺IFG ^{= τ}IFG ^,

and the same for D and I:

PD =PI=PDI=WPI(1+tI)=τI.

Initial equilibrium with tariff escalation

Denoting (*) for the equilibrium level, after some simple calculation, we get:

¹ We assume that these tariffs are not prohibitive, i.e., imports take place at equilibrium.

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