Tariff Escalation and Invasive Species Risk

DI * =

^τι
θτ_IFG

(4)

Since P_D=τ_I=αD*⁽^α^-¹⁾+z_II*, and D*+I*=DI*, we solve for D* and I*:

D* =^τ^Iα-z_I

z₁K
α-z_I

τ_I^θτIFG

θ—1

and

(5)

αK

I * =

α-z

τ_I^θτIFG

θ-1 _t

τ_I

α-z_I

(6)

Parameter z_I is assumed to be small enough so that α> z_I . This leads to a condition for both
domestic and imported input to be positive as the following:

_ 1 θ _ 1 θ

z₁DI* < Pi < αD1 * , or z₁K [Θt_ifo ]¹-^θ [τ₁ ]¹-^θ < 1 < αK [Θt_i_i,_g ]¹-^θ [τ₁ ]¹-^θ . (7)

Total welfare of the economy include the following components: the consumer surplus
associated with FG consumption, the surplus from the derived demand of DI captured in the
profit equivalent to the producer surplus associated with the supply of DFG, the producer surplus
associated with the supply of D, and the tax revenues generated by the imposition of τ_IFG and τ_I .

Reducing tariff escalation via a final-good tariff decrease

We now reduce the tariff escalation by reducing the tariff (and the associated factor) on the
processed final good, t_IFG , to t_I^N_FG < t_IFG ( τ_I^N_FG < τ_IFG ) and keeping t_I constant. The new
equilibrium, denoted by the double asterisk (**), is:

FG**=τ^N^-^γ

IFG

DFG**=

^τι

Θuⁿ^τIFG

θ-1___

(8)

(9)

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