how business activity can negatively affect the environment, e.g. pollution, depletion of resources

6.3.1 Environmental Issues (6.2 – Business and the Environment)

Learning Objective

Explain how business activity can have negative effects on the environment, identify the external costs involved, and evaluate how these effects create both constraints and opportunities for firms.

Key Concepts

• Externalities (external costs) – costs or benefits that affect third‑parties who are not directly involved in the economic transaction.
  • Negative externalities: pollution, resource depletion, health impacts.
  • Positive externalities: ecosystem services, knowledge spill‑overs.
• Pollution – the introduction of harmful substances or energy into the environment (air, water, soil, noise).
• Resource depletion – consumption of natural resources faster than they can be regenerated, leading to scarcity and price rises.
• Sustainable development – meeting present needs without compromising the ability of future generations to meet theirs.
  • Economic pillar: long‑term profitability, cost savings, market growth.
  • Social pillar: community well‑being, employee health, stakeholder trust.
  • Environmental pillar: protection of ecosystems, reduction of waste and emissions.
• Legal controls – statutes, regulations and international agreements that limit or manage environmental impact. Note that each country has its own legislation, so exam answers should refer to “relevant national/​international laws”.
• Business ethics – moral principles that guide a firm’s decisions, especially where profit motives conflict with social or environmental responsibility.

External Costs and Their Link to Business Impact

When a firm pollutes or extracts resources, the resulting health problems, ecosystem damage and climate change impose costs on society (e.g., NHS spending on asthma treatment). These costs are not recorded in the firm’s accounts, creating a gap between private profit and social welfare – a classic negative externality.

Types of Pollution Caused by Business Activity

1. Air Pollution
   • Sources: combustion of fossil fuels, industrial processes, vehicle emissions.
   • Key pollutants: CO₂, SO₂, NOx, particulate matter.
   • Consequences: global warming, acid rain, respiratory illnesses, reduced visibility.
2. Water Pollution
   • Sources: discharge of chemicals, oil spills, untreated effluent.
   • Consequences: eutrophication, loss of aquatic biodiversity, unsafe drinking water, loss of fisheries.
3. Soil Pollution
   • Sources: pesticides, herbicides, heavy‑metal waste, accidental spills.
   • Consequences: reduced soil fertility, bio‑accumulation in food chains, loss of arable land.
4. Noise Pollution
   • Sources: machinery, transport hubs, construction sites.
   • Consequences: hearing loss, stress, lowered quality of life for nearby residents.

Resource Depletion Caused by Business Activity

• Non‑renewable resources
  • Fossil fuels (coal, oil, natural gas) – used for energy and as feed‑stocks.
  • Minerals and metals (copper, aluminium, rare‑earth elements) – essential for manufacturing.
  • Implication: as reserves shrink, prices rise and firms may face supply shortages.
• Renewable resources
  • Forests (timber), fish stocks, freshwater.
  • If extraction exceeds the rate of natural regeneration, the resource becomes effectively non‑renewable, creating scarcity and higher costs.

Legal Controls (Key Examples)

• Environmental Protection Act (UK) – duties for waste disposal, emission limits, and penalties for non‑compliance.
• EU Emissions Trading Scheme (ETS) – caps total CO₂ emissions and allows trading of allowances.
• UN Convention on Biological Diversity – obliges signatories to protect ecosystems and promote sustainable use.
• Local permitting systems – pollution discharge licences, noise‑level limits, water‑use consents.
• Note: Other countries have comparable legislation (e.g., US Clean Air Act, Australian Environment Protection and Biodiversity Conservation Act). In exam answers, refer to “relevant national/​international law”.

Ethical Considerations

• Inter‑generational equity – the moral duty to preserve the environment for future generations.
• Stakeholder expectations – customers, investors, NGOs and local communities increasingly demand environmentally responsible practices.
• Green‑washing – making misleading claims about environmental performance; an ethical breach that can damage reputation.
• Resource‑related dilemmas – e.g., sourcing cheap minerals from mines with poor labour or environmental standards. These raise questions of external costs, stakeholder responsibility and corporate ethics (AO4 evaluation).

Sustainable Development & the Triple‑Bottom‑Line

Businesses that integrate the three pillars can turn environmental constraints into competitive advantages.

• Economic – cost savings from energy efficiency, waste reduction, and reduced raw‑material expenses.
• Social – stronger community relations, higher employee morale, and improved brand loyalty.
• Environmental – lower emissions, conservation of resources, and compliance with regulations.

Example: A packaging company adopts a circular‑economy model, designing cartons for reuse and recycling. This cuts raw‑material costs (economic), creates local recycling jobs (social) and reduces landfill waste (environmental).

Impact on Business and Society

Opportunities & Constraints (6.2.1)

• Constraints – legal limits, rising external costs, consumer pressure, scarcity of inputs, ethical scrutiny.
• Opportunities – development of green products, energy‑efficiency savings, access to eco‑label markets, government subsidies for renewable technologies, improved brand image.

Case Study Example – Textile Manufacturing (Company X)

• Uses large volumes of water for dyeing; untreated effluent containing heavy metals is discharged into a nearby river.
• Burns coal to generate steam, emitting CO₂ and SO₂.
• Consequences: river ecosystem damage, increased respiratory complaints among local residents, a government fine of $250 000, and a consumer boycott that cut sales by 8 %.
• Opportunity identified: invest in a closed‑loop water‑recycling system and solar‑generated steam. Projected outcomes – 70 % reduction in water use and elimination of coal‑related emissions, leading to lower operating costs and a stronger green brand.

Mitigation Strategies for Businesses

1. Adopt cleaner production techniques (renewable energy, waste‑recycling, water‑reuse).
2. Implement an environmental management system (e.g., ISO 14001) to monitor performance and ensure continual improvement.
3. Invest in R&D for sustainable materials and eco‑design (biodegradable packaging, low‑impact fibres).
4. Engage in CSR initiatives that go beyond legal compliance (community tree‑planting, carbon‑offset schemes).
5. Comply with national and international environmental legislation and use voluntary standards to demonstrate leadership.

Suggested Diagram

Flow chart: Business Activities → Environmental Impacts (pollution & resource depletion) → External Costs → Economic, Social & Environmental Consequences → Feedback Loop (Mitigation Strategies & Sustainable Development).

Review Questions

1. Explain how air pollution from a manufacturing plant can affect both the business (e.g., costs, reputation) and the local community (e.g., health, quality of life).
2. Identify two non‑renewable resources commonly used in production and discuss the long‑term implications of their depletion for both the firm and society.
3. Describe three measures a company can take to reduce its environmental impact and evaluate how each measure can create a competitive advantage.
4. Discuss the ethical dilemmas a business might face when deciding whether to source a cheap mineral that is mined under poor labour and environmental standards. Use the concepts of external costs and stakeholder responsibility in your answer.
5. Analyse how legal controls (e.g., emission permits) can both constrain and stimulate innovation in a firm operating in a heavily regulated industry.