Chapter 28: Environmental and Ethical Issues
This chapter explains how business activity affects the environment and society. It covers global warming, social responsibility, external costs and benefits, sustainable development, consumer and pressure-group influence, government controls, pollution permits and ethical decision making.
Topic 1: Business activity and the environment
Businesses use resources, produce goods and provide services, but their activities can damage the natural world.
1. Business activity and the environment
Business activity can damage the environment in several ways:
Air pollution
Factories and transport can release pollutants into the air.
Water pollution
Waste from production can pollute rivers, seas and other water sources.
Transport emissions
Road transport and aircraft can increase emissions.
Fossil fuels
Burning fossil fuels can contribute to environmental damage.
Resource depletion
Scarce natural resources may be used up too quickly.
Global warming
Business activity can contribute to global warming.
2. Global warming
Business activities may contribute through factory emissions, road transport, aircraft and burning fossil fuels.
3. Social responsibility
Examples include reducing pollution, recycling waste and using cleaner production equipment.
4. Should businesses protect the environment?
There are arguments on both sides. In exams, students should explain both the short-term cost problem and the possible long-term reputation benefit.
Arguments against greater environmental responsibility
- Environmentally friendly production increases costs.
- Higher costs reduce profit.
- Prices may have to rise.
- Higher prices may reduce sales.
- Environmentally responsible firms may become less competitive.
Arguments for greater environmental responsibility
- Environmental damage affects society.
- Scarce resources need protecting.
- Consumers increasingly prefer environmentally friendly businesses.
- A good environmental reputation can become a marketing advantage.
- Pressure groups may damage the reputation of polluting businesses.
Topic 2: Externalities, private costs and social costs
Some business decisions affect people who are not directly involved in the transaction.
5. Externalities
Business decisions can create effects on people who are not directly involved in the transaction. These effects are called externalities.
6. Private costs and private benefits
Private costs
Private costs are costs paid by the business or consumer directly involved in an activity.
Examples for a factory include land, construction, wages, transport and running costs.
Private benefits
Private benefits are benefits received by the business or consumer directly involved.
For example, revenue and profit earned from selling products.
7. External costs and external benefits
External costs
External costs are costs suffered by the rest of society because of business activity.
- pollution
- noise
- health problems
- loss of parkland
- traffic congestion
External benefits
External benefits are benefits received by society as a result of business activity.
- new jobs
- higher incomes
- other businesses moving into the area
- additional tax revenue for government
8. Social costs and social benefits
Social costs and social benefits combine the private effects and the external effects of business activity.
Governments may use cost-benefit analysis to compare the total social costs and benefits of a project.
Topic 3: Sustainable development and environmental pressure
Businesses may become more sustainable because of consumers, pressure groups and government controls.
9. Sustainable development
The aim is to achieve economic growth without using resources or damaging the environment so much that future generations suffer.
10. How businesses can become more sustainable
Four important methods are:
1. Use renewable energy
Examples include solar, wind and tidal energy.
2. Recycle waste
Materials and water can be reused rather than thrown away.
3. Use fewer resources
Lean production can reduce unnecessary use of materials, energy and other resources.
4. Develop environmentally friendly products
Examples include biodegradable packaging, less-polluting products and cleaner production methods.
11. Why businesses respond to environmental pressure
Three important influences are:
12. Consumer pressure
Consumers are becoming more concerned about environmental issues. If a business gains a reputation for pollution, destroying natural areas or irresponsible waste disposal, customers may stop buying its products.
Businesses may therefore change their products, packaging and production methods.
13. Pressure groups and consumer boycotts
Methods may include publicity campaigns, protests and consumer boycotts.
Pressure groups are more likely to succeed when:
- they have strong public support
- they receive media coverage
- boycotts significantly reduce sales
- they are well organised and financed.
14. Government environmental controls and pollution permits
Governments can introduce laws to control business behaviour. Examples include restrictions on building in environmentally sensitive areas, dumping waste into rivers or seas, and environmentally damaging production or disposal methods.
Business disadvantage
Environmental laws may increase production costs, increase prices and reduce competitiveness.
Social benefit
They may reduce pollution, protect natural resources and encourage cleaner production.
If a business wants to produce more pollution, it may have to buy additional permits or pay fines. Cleaner businesses may be able to sell unused permits, giving businesses a financial incentive to reduce pollution.
Topic 4: Ethical decisions and profit
Ethical decisions are based on moral principles, but they may increase costs or reduce short-term profit.
15. Ethical decisions
Examples of ethical issues include:
Bribery
Using payments or gifts unfairly to influence decisions.
Child labour
Using children in work that is considered unfair or harmful.
Destroying rainforests
Damaging natural environments to obtain resources or land.
Price fixing
Businesses agreeing prices instead of competing fairly.
Excessive executive pay
High executive pay while workers lose jobs may be viewed as unfair.
16. Ethics and profit
Businesses may face a conflict between doing what is ethically responsible and maximising short-term profit.
17. Benefits and limitations of ethical business decisions
Benefits
- Better reputation: consumers may prefer to buy from an ethical business.
- Positive publicity: ethical behaviour may generate favourable publicity.
- Higher long-term sales and profit: a stronger reputation may increase customer loyalty.
- Easier recruitment and investment: employees and investors may prefer to be associated with an ethical business.
Limitations
- Higher costs: ethically sourced materials and better working conditions may be more expensive.
- Higher prices: businesses may pass these higher costs to customers.
- Lower short-term profit: higher costs may reduce profits.
- Customers may prioritise price: if consumers mainly want cheap products, an ethical business with higher prices may lose sales.
18. Ethics: no automatic best answer
The chapter stresses that ethical decisions do not always have one obvious right answer. Students should consider business costs, profits, workers, customers, reputation, long-term consequences and social effects.
Topic 5: Key definitions, formulas and exam checklist
Use this final section to revise the terms and calculation points most likely to appear in exams.
19. Key definitions
| Term | Meaning |
|---|---|
| Environment | The natural world. |
| Social responsibility | Business decisions that benefit stakeholders other than shareholders. |
| Global warming | Gradual rise in the Earth's atmospheric temperature. |
| Private cost | Cost paid directly by the business or consumer. |
| Private benefit | Benefit received directly by the business or consumer. |
| External cost | Cost imposed on the rest of society. |
| External benefit | Benefit received by the rest of society. |
| Sustainable development | Development that does not harm living standards of future generations. |
| Pressure group | Group attempting to influence business or government decisions. |
| Consumer boycott | Consumers refusing to buy from a business. |
| Ethical decision | Decision based on moral principles. |
20. Essential formulas
21. What students must know for the examination
- Explain how businesses can damage the environment.
- Define and explain social responsibility.
- Distinguish between private and external costs and benefits.
- Calculate or identify social costs and social benefits.
- Explain sustainable development.
- Suggest ways businesses can become more environmentally sustainable.
- Explain how consumers and pressure groups influence businesses.
- Explain how governments use laws and pollution controls.
- Define ethical decision making.
- Identify examples such as bribery and child labour.
- Explain benefits and disadvantages of becoming more ethical.
- Discuss the conflict between profit and ethical/environmental responsibility.
- Make a justified judgement based on the particular business situation.