La Bourse / Volume IV / Nº IV.11 / Quiz, reflection, essays

A woman in a cream cardigan reading an open book on her lap, soft light from the side. — Plate IV.11 · Quiz, reflection, essaysThe Invoice, Read Twice.A number that will not come down is still a number you can build on. The mistake is not paying it. The mistake is calling it temporary.

ASSESSMENT · Chapter IV.11 — Where Regeneration Costs More

Three instruments: a ten-point quiz, eight reflection questions, five essay prompts. The quiz checks comprehension rather than recall. The reflections are private and first-person. The essays are arguable from more than one side.

THE QUIZ — ten points

Four on recall.

1. Name the three boxes every regenerative substitution belongs in, and say which instrument each takes.

Box one: already cheaper and unnoticed — no instrument, just do it. Box two: more expensive now, cheaper at a nameable volume — a financing instrument, typically the shared-savings facility of Chapter I.01. Box three: more expensive now and at every foreseeable volume — a procurement standard, a contract for difference, a tariff, or a levy on the substitute. One mark for the three boxes, one for naming the box-two/box-three instrument distinction. The stronger answer notes that a box-three item in a box-two instrument is the field's most expensive error.

2. State the three published organic yield gaps in the chapter, with their samples.

Seufert, Ramankutty and Foley (2012), 316 comparisons, 25 per cent; de Ponti, Rijk and van Ittersum (2012), 362 comparisons, 20 per cent; Ponisio et al. (2015), 1,071 comparisons, 19.2 per cent. Mean 21.4 per cent, spread 5.8 percentage points.

3. Write the permanent-premium decision rule and define every term.

p < p = m + s + τ·λ/(λ + w). p the premium per unit; m the realised revenue premium from an actual price test; s avoided direct cost; τ the levy per unit if you do not switch; λ the hazard rate of that levy's arrival; w the cost of capital. Full marks require saying that m is measured, never surveyed.*

4. What are the four instruments that spread a permanent premium, and in what sequence does the chapter deploy them?

Procurement standard, contract for difference, tariff, levy on the substitute. Sequence: standard first (demand that can be financed), CfD second (de-risk the supply), levy third (once an alternative exists), tariff last and only where trade exposure is material. Credit the reasoning that a levy imposed before supply exists is a tax with no exit and will be repealed.

Four on application.

5. A colleague proposes a seven-year shared-savings facility to fund a switch to kerbside-collected recycled polymer, arguing the cost will fall with volume. Diagnose it.

It is a box-three item in a box-two instrument. The dominant cost term is collection — a vehicle and a driver at a door, at about £2,444 per tonne kerbside — and that term falls with population density, not with cumulative experience. A facility repaid out of savings that never materialise defaults, and the default is read as evidence that the whole approach was wrong. The stronger answer proposes the alternative: contract deposit-return-sourced material at about £423/t collection cost, where the learning curve genuinely applies.

6. Your sustainability lead says a consumer survey shows 68 per cent of customers would pay more for recycled packaging. How does this enter the decision rule, and what is the trap?

It does not enter as m. m is the realised revenue premium from a live price test — a real price, a real basket, real abandonment. Stated preference systematically exceeds revealed preference, and substituting the survey figure inflates p*, which converts a donation into an apparent investment. The trap is that the error is invisible until the programme is scaled.

7. A public buyer wants 50 per cent recycled content and proposes a tax on packaging below a 30 per cent threshold. What will happen, and what should they write instead?

They will get 30 per cent. A levy with a threshold buys exactly the threshold: above it the tax is already avoided and the instrument pays nothing. To buy behaviour above a threshold, use a linear rate per percentage point of content, or an outcome standard with a term long enough to finance against. Credit any answer computing the maximum premium the levy can carry: £217.85 / 0.30 = £726.17 per tonne.

8. Why does the chapter treat the 2017 UK offshore wind auction result as the most important number in it, rather than as an inconvenience?

Because it is the case where a premium everyone serious called structural turned out to be a volume problem, and it was the premium-paying instrument itself that proved it — the strike was set by competitive auction rather than by estimate, so it had a clock on it. It establishes the duty: anyone who writes permanent must also write the observation that would falsify it. Credit the observation that this makes the chapter's other four claims stronger, not weaker, because it shows the classification is tested.

Two that require the arithmetic to be done.

9. A material carries a permanent premium of £420 per tonne. A live price test shows a realised revenue premium of £75/t. Avoided disposal and compliance are £55/t. A levy of £190/t is expected with a hazard rate of 0.20 per year, and your WACC is 11 per cent. Compute p*, state the decision, and say what you would actually contract.

λ/(λ+w) = 0.20 / 0.31 = 0.6452. Credit = 190 × 0.6452 = £122.58/t. p = 75 + 55 + 122.58 = £252.58/t. p = £420/t, so p / p = 1.663× and full substitution is a donation of £167.42 per tonne. The action is not to stop: contract the tonnage that pays — the fraction the levy's threshold rewards — and leave the balance on the incumbent until τ rises or λ shortens. Credit any working reaching £250–255 for p. The point of the question is that the answer is a fraction, not a yes or a no.*

10. An extractive advantage of £140 per unit per year lasts 5 years before imitation removes it. Your discount rate is 10 per cent. What perpetual margin is worth the same, and what does that tell you about a permanent premium?

Annuity factor = (1 − 1.10⁻⁵)/0.10 = 3.7908. NPV = 140 × 3.7908 = £530.71. The equivalent perpetuity is 530.71 × 0.10 = £53.07 per unit per year — 37.9 per cent of the temporary advantage. The stronger answer draws the conclusion: an advantage that cannot be competed away needs to be worth only about two-fifths as much to be worth the same money, and a cost that will not come down cannot be waited out by an entrant either — so a correctly priced permanent premium is a moat rather than a burden.

REFLECTION — eight questions, for one person and a pen

These are not for a room. Write the answers by hand if you can; the slowness is the point.

What have you told somebody would get cheaper, without having computed the volume at which it would? Write the volume now, or write that you do not know.

Where in your own life do you pay a permanent premium on purpose — and have you ever said so plainly, or have you been half-justifying it as an investment?

Think of a time you were wrong about a cost being structural. What did you see at the time, and what would have shown you sooner?

Which of your convictions about how things should be made has never met an arithmetic? Would you want it to?

When have you kept paying for something after the reason had gone, because nobody reviewed it? What would a review have cost?

What is the difference, for you, between an honest donation and a disappointing investment — and which do you find easier to defend out loud?

Where have you preferred permanent because it meant nobody had to keep trying? Name the specific thing.

If you had to write down the observation that would change your mind about the most important thing you believe about production, what would it be? If you cannot write one, what does that tell you?

ESSAY PROMPTS — five

Each is arguable from more than one side. Each requires at least one source the chapter cites and at least one it does not.

1. The yield gap and the land it costs. The chapter computes that a 19.2 per cent yield gap requires 23.8 per cent more land, and that in a fixed-demand landscape this costs habitat at a rising marginal rate. Argue either that this makes organic agriculture's global expansion a net loss for biodiversity, or that the framing is wrong because food demand is not fixed and is itself a policy variable. Use Ponisio et al. (2015) and Phalan et al. (2011), and at least one source on demand-side mitigation — dietary change, food waste, or yield-independent demand management — that the chapter does not cite.

2. Sparing, sharing, and what a reserve is surrounded by. Kremen (2015) argues the sparing/sharing binary misrepresents real landscapes and that a spared reserve in a sterile matrix is not what sparing's advocates model. Take a position on whether the chapter's arithmetic survives her critique. Engage Kremen directly and Balmford et al. (2018), and find at least one landscape-scale empirical study the chapter does not cite.

3. Is the repair economy a price band or a policy failure? The chapter's Baumol arithmetic says repair loses ground to manufacture monotonically and that repair only ever worked above a price line. Argue the counter-case: that the divergence is an artefact of unpriced externalities, design choices that raise repair cost deliberately, and tax systems that fall on labour rather than materials — and that a different policy would move the line. Use Wieser and Tröger (2018) and Baumol (2012), and at least one source on right-to-repair regulation or labour taxation that the chapter does not cite.

4. The premium that over-pays the gap. Crowder and Reganold (2015) find break-even premiums of 5–7 per cent against observed premiums of 29–32 per cent. Argue either that this represents a durable willingness to pay for attributes the yield comparison does not capture, or that it is a scarcity rent that will compress as supply grows — and say what evidence would settle it. Use Crowder and Reganold and Reganold and Wachter (2016), and at least one market study of organic price premiums over time that the chapter does not cite.

5. The instrument that ended the premium it was built to pay. UK offshore wind CfD strike prices fell from £114.39/MWh in 2015 to £39.65/MWh in 2019 — a real decline of 23.3 per cent a year — and the 2017 result beat a 2020 stretch target three years early. Argue either that competitive auction is the general solution to premium discovery and should be applied to materials and agriculture, or that offshore wind had specific conditions — a single homogeneous product, a creditworthy counterparty, deep capital markets, a technology with steep learning — that do not generalise. Use the CfD allocation round results and Nemet (2019), and at least one source on auction design or on a failed auction programme that the chapter does not cite.