The environment, external costs, ethics and pressure groups

Last time

Before we start: last time, in Why businesses need finance and where it comes from, you learned these points. Here they are again on one card. Keep them in mind, because today builds on them.

Doing business responsibly

A factory brings jobs to a town, but its smoke damages the air. A clothing firm sells cheap shirts, but its suppliers pay workers very little. Businesses affect people and the planet beyond their customers. This lesson covers external costs and benefits, ethics, and pressure groups.

Private and external costs

Private costs are paid by the business itself: wages, materials, rent. External costs are paid by others outside the business: pollution, noise, traffic, and damage to the countryside. Social cost is private cost plus external cost.

External benefits

External benefits are gains to people outside the business: new jobs, new roads built for a factory, and training that spreads skills. Local shops gain as workers spend their wages nearby. A full answer about a new factory weighs both its external costs and its external benefits.

Why respond to environmental pressure?

Customers increasingly prefer environmentally friendly products, so a green image can raise sales. Laws and fines punish pollution, and governments may give grants for cleaner methods. Pressure groups and bad publicity can damage the brand. And using less energy and materials can cut costs.

Government action on the environment

Laws set limits on pollution and waste, with fines for breaking them. Taxes on pollution, or on fuel, make polluting more expensive. Pollution permits limit how much a firm may pollute. And subsidies encourage clean energy.

Ethical decisions

An ethical decision is one based on what is morally right, not just on what is legal or profitable. Examples: paying fair wages, not using child labour, buying from ethical suppliers, and honest advertising. Ethical behaviour can cost more, and so reduce profit, at least in the short run.

Benefits of ethical behaviour

A good reputation attracts customers who care about ethics, and they may pay more. It attracts and keeps good workers, and avoids fines and boycotts. So ethics and profit can go together in the long run.

Ethical choices

Here are two common ethical choices, with a benefit and a cost of each. Twelve-mark questions often ask you to choose between them.

Pressure groups

A pressure group is an organisation that tries to influence businesses or the government, such as an environmental or consumer group. Methods: campaigns on social media, protests, boycotts of products, and lobbying the government for new laws. They succeed when they have public support and when the business fears for its reputation and sales.

Responding to pressure groups

Change its methods, for example cutting pollution or changing suppliers. This costs money but protects the brand. Explain its actions publicly, if it believes it is acting responsibly. Ignoring them is risky: boycotts can cut sales sharply.

Mistakes that lose marks

Mistake one: calling a business's own wage bill an external cost. Mistake two: saying ethical behaviour always raises profit. Mistake three: describing a pressure group without saying how it influences the business. The fix: name who pays, weigh cost and benefit, and give the method.

The full-marks tip

The full-marks tip: say who bears an external cost or benefit: people outside the business. For ethics, weigh the cost now against the reputation gain later.

On one card

So, on one card: environment and ethics. Keep it for revision.