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Cambridge IGCSE0450

Environmental and ethical issues

Business Studies 0450 Chapter Notes

What this chapter covers

Environmental and ethical issues - Environmental concerns and ethical issues as both opportunities and constraints for businesses
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Environmental and ethical issues notes

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In this chapter

  1. 1How business activity harms the environment
  2. 2External costs and external benefits
  3. 3Sustainable development
  4. 4Why a business responds to environmental pressures
  5. 5Pressure groups
  6. 6Legal controls on the environment
  7. 7Ethical issues: profit against doing right
  8. 8Responding to ethical issues

1. How business activity harms the environment

Business activity can damage the environment. The typical causes are pollution, depletion of natural resources and waste. The syllabus gives global warming as an example of the damage.

Each one is a different impact. Noise and waste in a river are both pollution, so they count as one impact. An answer has to name the impact. ‘Harming the environment’ on its own earns nothing.

Examiner insight

“A common mistake was to outline two examples of pollution which will only be awarded once.” “There were also vague references to damaging the environment which were not credited.”

Worked example 14 marks

Kestrel Cement digs limestone from a quarry and burns coal in its kilns. Outline two ways Kestrel Cement might harm the environment.

  1. 1

    Knowledge: pollution [1]. [1]

  2. 2

    Application: burning coal in the kilns puts smoke into the air [1]. [1]

  3. 3

    Knowledge: depletion of natural resources [1]. [1]

  4. 4

    Application: the limestone dug from the quarry is used up [1]. [1]

2. External costs and external benefits

A business decision can affect third parties: people outside the business. These effects are externalities. An external cost is a cost paid by a third party. An external benefit is a gain to a third party.

Typical external costs are pollution, such as waste in a river or noise, and depletion of natural resources. Typical external benefits are providing jobs, more tax revenue and better infrastructure.

Wages, sales and profit belong to the business. They are private, not external.

Examiner insight

“However, the majority of candidates needed to appreciate the difference between a private and external cost or benefit.” “A common error was to identify private benefits.”

Worked example 16 marks

Explain two external benefits a business might create. Which benefit is likely to be the most important? Justify your answer.

  1. 1

    Knowledge: provide jobs [1]. [1]

  2. 2

    Analysis: so there are lower rates of unemployment [1]. [1]

  3. 3

    Knowledge: pay taxes [1]. [1]

  4. 4

    Analysis: this increases government revenue [1]. [1]

  5. 5

    Evaluation: jobs matter most, as an income directly raises people’s living standards [1]. [1]

  6. 6

    Evaluation: tax revenue helps people only if the government spends it on health care [1]. [1]

3. Sustainable development

Sustainable development means operating in an environmentally friendly way that conserves resources for future generations. Examples are not causing pollution and using recycled materials.

The definition must say who the environment is protected for: future generations. Without them, the answer is only ‘protecting the environment’.

When asked how a business can contribute, name a method and say how it conserves resources. Do not drift into the advantages of being sustainable. Sustainable development is not the same as being ethical.

Examiner insight

“Many candidates could not provide a full definition of the term as the responses did not mention who the environment was being protected for, namely future generations.” “Instead of explaining how the way would contribute to sustainable development, they focused on the advantages of being sustainable including better brand image and sales.”

Worked example 16 marks

Larkin Toys makes wooden toys and posts them to customers in plastic boxes. Its owner wants the business to contribute to sustainable development. Explain two ways Larkin Toys could do this.

  1. 1

    Knowledge: use recycled materials [1]. [1]

  2. 2

    Application: Larkin could make its toys from reclaimed wood [1]. [1]

  3. 3

    Analysis: fewer trees are cut down, so more wood is left for future generations [1]. [1]

  4. 4

    Knowledge: use packaging that can be recycled [1]. [1]

  5. 5

    Application: Larkin could post its toys in cardboard boxes instead of plastic ones [1]. [1]

  6. 6

    Analysis: the boxes are used again, so fewer resources are extracted to make new ones [1]. [1]

4. Why a business responds to environmental pressures

Customers, pressure groups and the law all push a business to act in a more environmentally friendly way. A business that responds can turn the pressure into an opportunity.

The reasons are commercial. It can avoid pressure group action and boycotts, protect its reputation and brand image, and respond to changing customer demands. It can also differentiate itself from competitors, which may allow a higher price.

Each reason needs a development: what happens to sales, revenue or price. A question on reasons is not a question on methods.

Examiner insight

“Some candidates had the wrong focus so explained ways a business could damage the environment or how a business could help to protect the environment.” “Some candidates misinterpreted the question and outlined ways a business might create or prevent environmental problems rather than reasons why it should respond to them.”

Worked example 16 marks

Explain two reasons why a business might respond to environmental pressures. Which reason is likely to be the most important? Justify your answer.

  1. 1

    Knowledge: avoid pressure group action or boycotts [1]. [1]

  2. 2

    Analysis: such action may damage brand image [1]. [1]

  3. 3

    Knowledge: differentiate from competitors [1]. [1]

  4. 4

    Analysis: this could allow them to set higher prices [1]. [1]

  5. 5

    Evaluation: avoiding pressure group action is the most important reason, because a bad reputation is likely to lead to fewer sales [1]. [1]

  6. 6

    Evaluation: customers may not be willing to buy the products whatever the price set [1]. [1]

5. Pressure groups

A pressure group is a group of people with a common interest who try to influence business decisions. It has no power to make laws or to fine a business. It works by changing what customers, the public and the government think.

The ways it does this are customer boycotts, raising awareness through social media or leaflets, lobbying politicians, organising protests and petitions, and writing to the business.

Name the action the group takes. ‘It forces the business to change’ does not say how. The issue it campaigns about is not a way either.

Examiner insight

“Others incorrectly assumed a pressure group had the authority to introduce legal controls or financial penalties.” “Weaker responses often stated that pressure groups would force the business to change its way of working without identifying how they would do this.”

Worked example 14 marks

Outline two ways pressure groups might try to influence BRK’s decisions.

  1. 1

    Knowledge: customer boycotts, persuading customers to stop buying [1]. [1]

  2. 2

    Application: they would stop buying its copper [1]. [1]

  3. 3

    Knowledge: lobby politicians and ask the government to set stricter laws [1]. [1]

  4. 4

    Application: the laws would be about the mines [1]. [1]

7. Ethical issues: profit against doing right

An ethical issue is a choice between doing what is right and doing what earns the most profit. Examples are child labour and paying fair prices to suppliers.

The conflict is between profit and ethics. Cheaper suppliers and low wages cut costs. They may also be unfair to people. An ethical business gives up some profit, or takes on more cost, to do the right thing.

Ethics is not the same as the law. Paying the minimum wage is a legal obligation. Paying fair pay beyond what the law requires is an ethical choice.

Examiner insight

“For example, paying the minimum wage is a legal obligation, not an ethical consideration.” “To gain full credit on this question responses needed to focus on the relationship between profits and being ethical.”

Worked example 16 marks

Dunmere Garments sells cheap jeans. A supplier offers cotton at a much lower price, but Dunmere has heard that the supplier uses child labour. Do you think Dunmere Garments should buy from this supplier? Justify your answer.

  1. 1

    Knowledge: the cheaper cotton lowers Dunmere’s costs [1]. [1]

  2. 2

    Analysis: so it earns more profit on each pair of jeans [1]. [1]

  3. 3

    Knowledge: using a supplier with child labour is unethical and may damage Dunmere’s reputation [1]. [1]

  4. 4

    Analysis: customers may stop buying its jeans, so sales fall [1]. [1]

  5. 5

    Evaluation: Dunmere should not buy, because the loss of sales from being associated with an unethical supplier could outweigh the benefit of lower costs [1]. [1]

  6. 6

    Evaluation: the saving is a short-term gain, but the damage to its reputation is a long-term cost [1]. [1]

8. Responding to ethical issues

A business can respond to an ethical issue by refusing to use child labour, paying fair prices to suppliers, and paying fair wages to employees. Each choice has a cost and a benefit.

The cost is usually higher costs in the short term. The benefit is a better brand image and more sales to ethically minded customers. Being linked to unethical suppliers can lose sales.

A strong answer weighs the short-term costs against the long-term benefits and then makes a decision.

Examiner insight

“Often evaluation marks were not awarded as candidates often simply made an unsupported decision or restated points previously made in their answers.” “The best answers considered points both for and against being ethical before reaching a justified decision.”

Worked example 16 marks

Harrow Chocolate buys cocoa from farmers in West Africa. It is thinking of paying the farmers a fair price and of refusing to buy from any farm that uses child labour. Explain two ways Harrow Chocolate might respond to ethical issues. Which way is likely to be the most important? Justify your answer.

  1. 1

    Knowledge: paying fair prices to suppliers [1]. [1]

  2. 2

    Analysis: this raises costs in the short term but improves brand image, which can increase sales to ethically minded customers [1]. [1]

  3. 3

    Knowledge: refusing to use child labour [1]. [1]

  4. 4

    Analysis: Harrow is not linked to unethical suppliers, which could lose it sales [1]. [1]

  5. 5

    Evaluation: refusing child labour is the most important, because the loss of sales could outweigh anything saved by buying cheaper cocoa [1]. [1]

  6. 6

    Evaluation: a fair price matters less, because it adds to costs at once and gains sales only if customers hear about it [1]. [1]

Recap

  • Business activity harms the environment through pollution, depletion of natural resources and waste. Name the impact.
  • Externalities are effects on third parties outside the business. External cost: pollution. External benefit: jobs, tax revenue.
  • Sustainable development: environmentally friendly operation that conserves resources for future generations.
  • Reasons to respond to environmental pressures: avoid pressure group action, protect reputation, meet customer demand, differentiate from competitors.
  • Pressure groups try to influence by boycotts, publicity, lobbying, protests and petitions. They cannot make laws or fine.
  • Legal controls such as pollution controls can cut production, bring fines and raise costs. They affect every business.
  • An ethical issue is a conflict between profit and doing right. Child labour and unfair prices are examples. The minimum wage is law.
  • Weigh short-term costs against long-term benefits, then decide.

End-of-chapter exercise

Test yourself on the whole chapter. Work through these before moving on.

  1. Orlan Foods runs a large food factory. Identify two external costs the factory might create.2 marks
  2. Wren Paper says that its aim is sustainable development. Define ‘sustainable development’.2 marks
  3. Maddox Shoes buys its shoes from factories in other countries. Identify two ethical issues Maddox Shoes might face.2 marks
  4. Brecon Bottles makes plastic bottles. A pressure group is campaigning against plastic waste. Outline two ways the pressure group might try to influence Brecon Bottles.4 marks
  5. Tamsin Tiles makes ceramic tiles in kilns that release smoke. The government introduces a pollution control that limits smoke. Outline two ways the control might affect Tamsin Tiles.4 marks
  6. Rydal Cycles assembles bicycles in a factory with 80 employees. It buys its tyres from suppliers in other countries. Outline two ways Rydal Cycles could act ethically.4 marks
  7. Selby Soaps sells soap in plastic packaging. Its customers are asking for less plastic. A pressure group has criticised soap makers for the plastic waste they cause. Explain two reasons why Selby Soaps might respond to these environmental pressures.6 marks
  8. Alder Furniture makes wooden chairs. Its factory runs on electricity from a coal power station. It throws away the offcuts of wood from each chair. Explain two ways Alder Furniture could contribute to sustainable development.6 marks
  9. Vance Aggregates plans to dredge sand from a river bed beside a fishing village. Vance will pay $2 million for the dredger and expects its profit to rise. The plan will employ 60 people from the village. Vance will build a new road to the site, which the villagers may use. The dredging will make the river muddy, so the village’s fishermen will catch fewer fish. Lorries will make noise as they pass the village 40 times a day. The sand taken from the river bed is not replaced. Explain two external benefits and two external costs of the plan.8 marks
  10. Pennine Dyes makes fabric dye. Its profit is 400 000 a year. The factory pours waste into a river. A pressure group has organised a customer boycott. While the waste continues, the boycott cuts Pennine’s profit by100 000 a year. The group will end the boycott if the waste stops. Next year a pollution control begins. Any factory that still releases waste into a river will pay a fine of $150 000 a year. The directors have three options, set out in the table. All figures are for one year. Consider the three options. Which option should the directors choose? Justify your answer. | Option | What Pennine Dyes does | Change in costs | | --- | --- | --- | | A | Changes nothing and pays the fine | none | | B | Treats its waste so that none reaches the river | rise by $90 000 | | C | Changes nothing, pays the fine and buys a cheaper chemical from a supplier that uses child labour | fall by $120 000 |12 marks

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