Environmental Concerns: Externalities | Business Studies for GCSE/IGCSE - Year 11 PDF Download

The Impact of Business Activity on the Environment

• Business operations frequently affect the natural environment in various ways.
• Profit often takes precedence over environmental protection for many businesses.
• Socially responsible businesses often prioritize minimizing negative environmental effects and occasionally endeavor to contribute positively to the natural world.

The Effects Businesses can have on the Environment

Externalities

• Externalities refer to the effects on third parties not part of a transaction between a buyer and a seller. These effects can be positive or negative and are commonly known as spillover effects.
• Externalities can occur on the production side (producer supply) or on the consumption side (consumer demand) of the market.

Private, external and Social costs

• External costs occur when the total costs of a business activity surpass the expenses borne by the immediate parties involved. Private costs refer to the expenses paid directly by businesses, consumers, or the government for a product or service. 
  • For instance, if a consumer pays $9 for a McDonald's meal, that is a private cost. On the other hand, external costs are the additional impacts not considered in the transaction, such as when a consumer discards their McDonald's packaging on the street, leading the government to allocate resources for cleaning up the litter. 
• Social cost encompasses both the expenses borne privately and those incurred by society as a whole.
• It provides a more accurate depiction of the genuine expense associated with a business transaction.
• Social cost = private cost + external cost 

Private, External, and Social Benefits

• External benefits arise when the overall advantages to society from a business transaction exceed the individual gains.
  • Private benefits refer to the specific advantages acquired by consumers, producers, or the government from consuming or producing a good/service, such as the income earned by a bee farm through honey sales.
  • An external benefit, also known as a positive externality, pertains to the benefits not directly considered in the business transaction, like how bees from the farm pollinate neighboring apple orchards.
• Social benefit encompasses both the private benefit and the external benefit to society.
  • It offers a more accurate reflection of the genuine advantage derived from an economic transaction.
  • Social benefit = private benefit + external benefit 

Examples of Private Costs & Benefits

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

Examples of External Costs and Benefits

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

• Private costs and benefits fail to incorporate the broader societal repercussions, whether negative or positive.
• When a business's proposals necessitate external authorization, such as government planning permission, the overall social costs and benefits are typically evaluated.
  • If the social benefits outweigh the social costs, the business's proposals are likely to receive approval.
  • Conversely, if the social costs exceed the social benefits, the business's proposals are likely to be denied.

Controls over Business Activity Affecting the Environment

• Governments possess the authority to regulate businesses' impact on the environment through legislation and enforcement actions against violators of environmental laws.
• Governments can opt to:
  • Modify laws to render environmentally harmful practices illegal, such as:
    • Restricting the establishment of certain businesses in ecologically delicate regions like rainforests.
    • Prohibiting the disposal of hazardous waste into water bodies.
    • Prohibiting the use of hazardous materials in manufacturing processes and packaging.
  • Levy fines on businesses found in violation of environmental regulations and mandate them to remediate environmental harm.
  • Impose restrictions on business operations that result in environmental degradation.
  • Pollution permits enable businesses to emit pollutants within a specified threshold. If a business exceeds this limit, they must procure additional permits either from the government or from environmentally-conscious businesses.