Page 319 - Cambridge IGCSE Business Studies

25: Environmental and ethical issues

Externalities
External stakeholders: see Some business activities are more environmentally friendly than others.
Chapter 5, page 63.
How a business uses energy, disposes of waste or creates pollution may have

far-reaching effects on the local community and other businesses in the area
and beyond. People and organisations not directly involved in a business’s

decision-making but who will be affected by its operations are external
stakeholders.
KEY TERMS
A business’s activities can have a negative or positive impact on the community
and the environment – these are known as externalities.
Externality: the effect of business

activities on unrelated parties.
■ Negative externalities make up the social cost of a project. For example the setting
Social cost: the negative impact up of a new hospital in a residential area will cause traffic congestion and increased

of a business decision on society.
noise levels for the residents.
Social benefit: the positive
■ Positive externalities contribute to the social benefits of a project. For example, the
impact of a business decision on
society. construction of a new hospital in a residential area will create more jobs and the
local community will have easier access to health care.
ACTIVITY 25.1

Loreli Handa wants to set up a detergent manufacturing factory very close to a nature reserve (protected area). The nature
reserve is also a popular tourist spot. She likes the site because it is cheap and close to a good supply of water. The nearest
city also has a high unemployment rate.
Before putting her proposal to the government, she analyses the potential externalities of this project (Table 25.3). Loreli
hopes her proposal will be approved as she has invested a lot in research and development and is willing to work with the
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government to help improve the infrastructure of the area (to benefit her and the community as well).

Positive externalities Negative externalities

New production techniques can lead to a better Air pollution caused by fumes created
product at reduced costs. This knowledge can by manufacturing plants, contributing to climate
be shared with other businesses. change as a result of green house gas emissions.
Other forms of pollution may also be created.
The business may improve the infrastructure Having a factory close to the nature reserve
in the area by having a reliable power supply, will spoil the beauty of the place and also
better transportation network, schools and discourage tourists from coming.
hospitals. It may provide these facilities to keep
employees motivated. This can be beneficial
to the employees as well as the community in
that area.
Due to research and development, consumers Road congestion caused by delivery lorries will

can have access to improved products at also affect the tourism in the area.
possibly reduced costs.
The business will provide employment for the Destruction of ecology in the area due to
local people. sound, light and air pollution from the factory.

Table 25.3 Positive and negative externalities of Loreli Handa’s proposal

1 Analyse and discuss whether the impact of the positive externalities is greater than the negative externalities.
2 Should the government approve the proposal?