Business Studies: Cost Benefit Analysis

• The major objectives of businesses is to provide services profitably and to survive
• Traditionally profit has been the overriding goal of the owners of the business
• But often the activities of businesses have an impact on the environment
• Environment refers to the natural world around us
• Businesses often impact the environment in a number of ways
• These includes:
  1. Emissions from business owned vehicles,machines, aircraft ships etc
  2. Pollution from waste emissions for example smoke from chimneys
  3. Waste disposal into rivers and dams e.g. sewage in Lake Chivero
  4. Noise from machinery
  5. Environmental scarring due to the business’s activities for example mining
  6. Destruction of natural habitats
  7. Consumption of non renewable resources
  8. Global warming
• As pointed out earlier on there are a number of stakeholders to the business
• These stakeholders include the community where the business is located
• The surrounding community are greatly affected by the business’s operations
• The modern view to all this is that in addition to catering the needs of its internal stakeholders such as shareholders,
• Businesses should also clean up after themselves
• So when evaluating whether a business should operations should commence in a given area cost benefit analysis is used

Cost Benefit Analysis (CBA)

• It is a process of evaluating a business’s operations and decisions
• It involves assessing all the benefits associated with a decision/operation and weighing these against all of the costs of that decision/operation
• Unlike other investment appraisal techniques cost benefit analysis assesses both the traditional costs and benefits of a decision as well as its positive and negative extenalities
• Traditional costs are made up of costs that are internal to the organisation
• Examples include capital costs, maintenance costs etc
• Traditional benefits include an increase in revenue and profit
• Externalities- these are benefits and costs that affect external stakeholders to the business
• In the event of a mining company locating in a remote area of Zimbabwe for example
• Positive externalities would include better road access, increased employment chances, better housing, access to electricity etc
• Negative exeternalities would include destruction of wildlife habitants, loss of arable and grazing land to mining activities, water pollution, noise pollution etc
• Internal costs would include the capital and labour to the owners of the business as well as other operating costs
• Negative externalities are also known as social costs
• Positive externalities are also known as social benefits
• Cost benefit analysis would require the weighing of internal costs as well as social benefits and costs before allowing the prospecting mining company to proceed with its operations

Internalising external costs

• Since it is not the business that get to incur social costs the government has implemented various ways in order to force governments to consider social costs when making a decision
• Several environmental laws have been passed to force businesses to
  1. Reduce pollution
  2. Switch to cleaner sources of energy
  3. Clean up after themselves
• Business that fail to comply with these laws are taken to court and fined
• Severe breaches of these laws can see a business losing its operating licence
• The government has also set up an Environmental Management Agency
• The agency enforces these environmental laws, investigating and fining businesses which breach them
• The government has also introduced various taxes such as carbon tax so that those affected are persuaded by an increase in costs to switch to cleaner sources of energy
• Private individuals have also banded together into pressure groups to fight for their rights

To access more topics go to the O Level Business Notes