Environmental Concerns: Externalities (CIE IGCSE Business)

• Business activity often has a range of impacts on the natural environment
• In many cases, businesses consider the pursuit of profit to be more important than protecting the environment 
• Socially responsible businesses often choose to limit negative impacts and sometimes take steps to make a positive impact on the natural world
   

The Effects Businesses can have on the Environment

Effect	Explanation	Examples
Resource consumption	Natural resources, such as water, energy and raw materials, are used in business operations Excessive consumption of these resources can lead to their depletion  Materials and products may be sourced from environmentally sensitive areas	Industries like logging, agriculture, and construction contribute to deforestation in locations such as South America This has a significant impact on biodiversity and contributes to global warming
Pollution	Some industrial processes generate pollutants, including air and water emissions, hazardous waste and chemical byproducts The disposal of these pollutants can harm ecosystems, wildlife  and human health The burning of fossil fuels releases large amounts of greenhouse gases into the atmosphere	Food and consumer goods manufacturers account for 60% of worldwide greenhouse gas emissions Single-use plastics are a huge concern They produce toxic chemicals when they break apart This causes pollution and harms animals, such as marine turtles, who become entangled in plastic found in the sea
Waste generation	Businesses generate significant amounts of waste including solid waste, packaging materials and electronic waste Poor waste management can lead to pollution and large amounts of non-biodegradable materials in landfill sites This waste is often exported to poorer countries, worsening their environmental and social conditions	High technology industries have received criticism for exporting e-waste to China and Nigeria, sometimes illegally E-waste is processed in an unsafe manner by low-paid, unprotected workers and frequently dumped into rivers near residential homes
Innovation and sustainability	Some businesses drive positive environmental change through innovation and sustainable practices Conservation efforts such as tree planting and  wildlife preservation are increasingly being adopted by businesses Investment in eco-friendly technologies, renewable energy and environmentally conscious manufacturing processes can limit their impact on the natural environment	Fashion brands are increasingly using sustainable materials such as bamboo and fibres from agriculture waste in their clothing ranges H&M is using cupro, a material made from cotton waste in some of its products Research into alternatives to polyurethane used in the manufacture of fashion accessories is using nanotechnology and DNA sequencing

• Externalities occur when there is an external impact on a third party not involved in the business transaction between the buyer and the seller
  • These impacts can be positive or negative and are often referred to as spillover effects
  • These impacts can be on the production side of the market (producer supply) or on the consumption side of the market (consumer demand)

Private, external and social costs

• External costs occur when the social costs of a business transaction are greater than the private costs
  • A private cost for the business, consumer or government is what they actually pay to produce or consume a good/service e.g. a consumer pays $9 for a McDonald's meal
  • An external cost is the damage not factored into the business transaction, e.g. the consumer throws their McDonalds packaging onto the street and the Government has to hire cleaners to collect the litter
     
• The social cost includes both the private cost and the cost to society
  • It is a better reflection of the true cost of a business transaction
  • Social cost = private cost + external cost 

Private, external and social benefits

• External benefits occur when the social benefits of a business transaction are greater than the private benefits
  • A private benefit for a consumer, producer or government is what they actually gain from producing or consuming a good/service e.g. a bee farm gains the private benefit of the income from selling their honey
  • An external benefit (positive externality) is the benefit not factored in to the business transaction, e.g. The bees from the bee farm pollinate the nearby apple orchards
     

• The social benefit includes both the private benefit & the external benefit to society
  • It is a better reflection of the true benefit of an economic transaction
  • Social benefit = private benefit + external benefit 

Private Costs and Benefits of a Decision to Launch a New Product

Private Costs	Private Benefits
Market research  Costs to carry out surveys and interpret results Product development Expenses of developing prototypes/refining designs Promotion Advertising expenses related to the product launch Distribution Postage and delivery costs to deliver the product to stockists or customers	Revenue Income from sales Market share Customers gained at the expense of rivals Reputation Improved customer perceptions of the business Broader product range Lower risk from market change

• Private costs and benefits do not account for negative or positive impacts on wider society
   

External Costs and Benefits of a Decision to Launch a new Product

External Costs	External Benefits
Increased waste More packaging and processing may pollute the environment Harmful product features Addiction or over-reliance may be damaging to health and wellbeing Increased production facilities Requires land that may be used for other purposes such as recreational parks	Greater customer choice An improved product range may lead to lower prices across the whole market Creation of a new industry The new product may lead to the creation of new university courses or specialist business parks, such as occurred through the introduction of artificial intelligence (AI)

• Where a businesses plans require external approval such as planning permission from government, the overall social costs and benefits are often weighed up
  • If social benefits are greater than social costs the businesses plans are likely to be approved
  • If social costs are greater than social benefits the businesses plans are likely to be rejected

• Businesses impact on the environment can be controlled by governments, which can legislate or take enforcement action against those that break environmental laws

• Governments can choose to
  • Change laws to make environmentally-damaging practices illegal, such as
    • Prohibit the location of certain businesses in environmentally sensitive areas, such as rainforests
    • Outlaw the dumping of hazardous waste into waterways
    • Banning the use of hazardous materials in manufacturing processes and packaging
       

• • Impose fines on businesses that break environmental regulations and order them to clean up environmental damage
     
  • Impose limits on business activities that cause environmental damage
    • Pollution permits allow businesses to pollute up to a certain limit
    • If more pollution is produced a business must purchase extra permits from the government or from a more environmentally-friendly business