Environmental and ethical issues
Businesses consume natural resources and produce waste, which directly affects the planet. This is often linked to global warming, where greenhouse gas emissions trap heat in the atmosphere.
| Type of Impact | Explanation | Example |
|---|---|---|
| Pollution | Release of harmful substances into air, water, or land. | Smoke from factories causing acid rain; chemical waste contaminating rivers. |
| Resource Depletion | Using non-renewable resources faster than they can be replaced. | Over-mining for metals; deforestation for timber or paper. |
| Habitat Loss | Destruction of natural environments for business expansion. | Building factories on green land, displacing wildlife. |
Building on the concept of externalities, these environmental damages are often external costs because the business does not pay for them directly; society bears the cost instead.
An externality is a side effect of business activity that affects third parties (people or groups not directly involved in the transaction). Externalities can be costs (negative) or benefits (positive).
| Concept | Definition | Who pays/receives? |
|---|---|---|
| External Cost | A cost imposed on society by business activity. | Society / Third parties pay (e.g., health costs from pollution). |
| External Benefit | A gain received by society from business activity. | Society / Third parties receive (e.g., jobs created, infrastructure improved). |
Why this matters: Businesses often ignore external costs because they do not appear in their financial accounts. This leads to over-production of harmful goods. Legal controls are used to force businesses to 'internalize' these costs.
Sustainable development is meeting the needs of the present without compromising the ability of future generations to meet their own needs. Businesses contribute to this by balancing profit with environmental and social responsibility.
| Strategy | How it contributes to sustainability |
|---|---|
| Reduce | Using fewer raw materials or energy (e.g., lightweight packaging). |
| Reuse | Using items multiple times (e.g., refillable bottles). |
| Recycle | Processing waste materials into new products. |
| Renewable Energy | Switching from fossil fuels to solar, wind, or hydro power. |
This relates to ethical issues because sustainable practices often require businesses to prioritize long-term social good over short-term profit maximization.
Businesses face pressure from pressure groups (organizations campaigning for specific causes) and government regulations. They may respond to protect their reputation or avoid fines.
| Pressure Group Action | Business Response |
|---|---|
| Boycotts | Customers stop buying the product. → Business changes practices to restore image. |
| Negative Publicity | Media campaigns highlighting bad behavior. → Business issues apologies and adopts greener policies. |
| Protests/Demonstrations | Direct action at business sites. → Business engages in dialogue or improves safety/environmental standards. |
Businesses may also see opportunities, such as developing 'green' products to attract environmentally conscious customers.
Governments use laws to force businesses to account for their environmental impact. These controls turn external costs into internal costs.
| Legal Control | Function |
|---|---|
| Pollution Limits | Setting maximum levels of emissions or waste allowed. |
| Fines/Penalties | Charging money for breaking environmental laws. |
| Permits/Licenses | Requiring permission to operate in sensitive areas (e.g., near forests). |
Why use legal controls? Without them, businesses have no financial incentive to protect the environment because it is cheaper to pollute than to clean up.
Ethical issues involve moral principles about what is 'right' or 'wrong'. A key conflict is between profit maximization (doing what is best for shareholders) and ethical behavior (doing what is morally right).
| Ethical Issue | Description |
|---|---|
| Child Labour | Employing children instead of adults, often in dangerous conditions. |
| Fair Wages | Paying workers a living wage vs. the minimum legal wage. |
| Animal Testing | Testing products on animals for safety vs. animal welfare rights. |
Note: Ethical issues are distinct from legal issues. An action can be legal but unethical (e.g., paying the lowest possible legal wage in a poor country).
Businesses can respond by adopting Corporate Social Responsibility (CSR) policies. A specific example is Fair Trade.
| Response | Explanation |
|---|---|
| Fair Trade Certification | Paying suppliers a price that covers the cost of sustainable production plus a living wage, ensuring supplier viability. |
| Supply Chain Audits | Checking suppliers to ensure they do not use child labour or unsafe practices. |
| Transparency | Publishing reports on where materials come from and how workers are treated. |
Paying Fair Prices: This means paying above the market price if necessary to ensure the supplier can operate sustainably. For example, a coffee company might pay 2.00/kg (Fair Trade) instead of1.50/kg (Market Price) to support farmers.
Definition: Costs paid for by the rest of society, other than the business, as a result of business activity.
Key elements to include in an answer:
- Mention 'society' or 'third parties' (not the business).
- Specify it is a cost or disadvantage.
- Link it to business activity.
Definition: Gains to the rest of society, other than the business, as a result of business activity.
Key elements to include in an answer:
- Mention 'society' or 'third parties' (not the business).
- Specify it is a gain or advantage.
- Link it to business activity.
Definition: Meeting the needs of the present without compromising the ability of future generations to meet their own needs.
Key elements to include in an answer:
- Mention 'present needs' and 'future generations'.
- Use the word 'compromise' or 'harm'.
| Type | Example | Explanation |
|---|---|---|
| External Cost | Air pollution from exhaust fumes. | Local residents suffer health issues (asthma), but the car company does not pay for their medical bills. |
| External Benefit | Job creation for local workers. | Workers earn income and spend it in the local economy, boosting other businesses. |
Note: The car company only pays for its internal costs (wages, materials). The health costs are external.
| Pricing Model | Price Paid | Outcome for Farmer |
|---|---|---|
| Market Price | 1.50 per kg</td> <td style="text-align:left">Farmer barely covers costs; vulnerable to price drops.</td> </tr> <tr> <td style="text-align:left"><strong>Fair Trade Price</strong></td> <td style="text-align:left">2.00 per kg | Farmer earns a living wage; can invest in sustainable farming methods. |
Why it matters: Paying the Fair Trade price is an ethical choice, not just a legal one. It ensures the supplier's long-term viability.
The Correction: Legal compliance is a minimum requirement. Ethical issues arise when businesses go beyond the law to do what is morally right. For example, paying the legal minimum wage is legal, but paying a living wage is ethical. Do not use 'it is illegal' as an argument for why something is unethical; use moral reasoning.
The Error: Students list environmental issues (e.g., pollution) when asked for ethical issues, or vice versa.
The Correction:
- Environmental issues relate to the physical planet (pollution, waste, resources).
- Ethical issues relate to human/moral treatment (child labour, fair wages, animal welfare).
- Note: There is overlap (e.g., sustainable farming is both), but be precise. If asked for ethical issues, focus on people and moral rights.
Why examiners accept this: Examiners look for a balanced evaluation. You must weigh the financial impact against the reputational/social impact.
Correct Usage Example:
'While ethical practices increase costs (disadvantage), they build brand loyalty and prevent boycotts (advantage). Therefore, the long-term advantage is greater because it ensures survival.'
Key Phrase: 'In the short term... however, in the long term...'
Why examiners accept this: The definition must explicitly exclude the business. If you say 'costs to the company,' it is wrong.
Correct Usage Example:
'An external cost is a cost borne by third parties or society, not the business itself.'
Key Phrase: '...paid for by society, not the firm.'
External Benefit (2 marks): Gains received by third parties/society from business activity, not gained by the business. (1 mark for definition, 1 mark for 'third party/society').
Way 2 (2 marks): Reduce waste by recycling materials in production. (1 mark for idea, 1 mark for explanation/link to resource conservation).
1. Good Reputation: Ethical behavior builds trust, leading to customer loyalty and ability to charge higher prices.
Disadvantages (Identification + Development):
2. Higher Costs: Ethical sourcing (e.g., Fair Trade) increases variable costs, reducing profit margins.
Justified Decision:
The advantages are greater in the long term because a damaged reputation can lead to boycotts and loss of market share, which is more costly than higher production expenses.
Key Points for Discussion:
1. Child Labour: High negative publicity; severe damage to brand image globally.
2. Fair Wages: Positive PR if addressed; less damaging if ignored compared to child labour.
Justification Example: 'Child labour has a bigger effect because it violates fundamental human rights, attracting international media attention and government sanctions, whereas wage issues are often seen as economic disputes.'