Page 320 - Cambridge IGCSE Business Studies

Cambridge IGCSE Business Studies Section 6 External influences on business activity

External costs and external benefits of business decisions
Businesses need to work out if the externalities created by their decisions are

KEY TERM justifi ed. Th ey use cost-benefi t analysis to do this. The social benefi ts must
outweigh the social costs, and the interests of the various stakeholders need to be
Cost-benefit analysis: analysis taken into account. This is not an easy task as it is hard to put a value on some costs,

of the costs and benefits of a
for example the cost of overfi shing.
project, the focus being on the

social costs and benefits. Also, there can be conflicting interests. For example, a business may decide
to use expensive technology in order to reduce its pollution levels (meeting the
interests of the community) but this will increase costs and reduce overall profi ts
(affecting shareholders and owners).

Negatives
or
Positives costs
or

benefits

318

Corporate social Figure 25.2 Cost-benefit analysis
responsibility: see
Chapter 5, page 59. Corporate social responsibility is at the heart of business decisions, which makes a
business think of the overall impact on the public.

ACTIVITY 25.2

Country X has one international airport in its capital city. The existing airport is unable to handle the increased air traff ic.
The government is planning to open a second airport. The proposed location is near a residential area. There has been a lot
of opposition from environmentalists and the community in the area of the proposed location. The government, however,
thinks this will be good for the economy (which is in recession) and wants to go ahead with the decision.

1 Identify the stakeholders involved in this business decision.
2 As a spokesperson for the community, identify and analyse the social costs that the community would have to
experience because of a new airport near them.

3 Imagine you are a government official placed in a decision-making committee of this project. Explain the economic
benefits of this decision and how they will help the economy grow.
4 From the point of view of an environmentalist, discuss the impact (social costs) that this business decision would have
on the environment.
5 Present the above arguments of at least three of the stakeholders (identified in question 1) in a table. Conduct a cost-
benefit analysis and evaluate whether this project is worth considering. Do the economic and social benefits exceed the
social costs?