Lec 4-Responsible Business

8/3/2019 Lec 4-Responsible Business

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M Jamshed Khan, Dept. of Economics, Edwardes College Peshawar 1


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RESPONSIBLE BUSINESS

Companies are coming under pressure forbetter environment performance.

90% of the consumers in the U.K consideredgreen issues in relation to their consumption.

Membership of the largest 13 green groupsgrew over 5 million and have a staff of 1500.


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RESPONSIBLE BUSINESS Concerns over pollution and over-population led

to the arising of the modern green movement.

From 1980s onwards a series of ecologicaldisasters, such as:

Emission at the Union Carbide plant at Bhopal

Chernobyl nuclear reactor in the USSR

Exxon Valdez oil spill in Alaska

Torching of the Kuwaiti oil fields at the end of Iraqi invasion

reawakened public concern and fears about

environment dangers


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Scientific progress has also increased the

green consciousness


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RESPONSIBLE BUSINESSThe Business Response

1) Green products- Companies usingecological friendliness as a marketing

tool.2) Changed practices- Bad publicity has

actually led to improvements.

3) Limits- There is a limit to whichconsumer are going to change their lifestyle.


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The Business Response.cntd

Environmental impact assessment-Companies

review not just the finished product but theirproduction process too.


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Types of Impact

There can be two types of effects of ecological

concerns on business.

1) Direct Impact2) Indirect impact


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1) Direct Impacts

(a) The can affect costs or the availability of

resources (mining in natural areas)(b) They can effect consumer demand (Shell)

(c) They effect power balances between

competitors in a market(d) Legislative change may affect the frame

work within which businesses operate.


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2) Indirect Impacts

Indirect impacts may manifest themselvesin, for example, pressure form suppliers or

staff as a consequence of concern over

ecological problems.


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RESPONSIBLE BUSINESSIssues relevant to business

Among the ecological issues, that are relevant

to business, are the following.

1)Resource Depletion:Resource depletion may influence operations

through impacts on the availability of raw

material through damage to soil, water, trees,plant life, energy availability, mineral wealth,

animal and marine species.


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2)Genetic Diversity:

More relevant to pharmaceutical firms, firmsin bio-technology, the agriculture and foodindustry.

Development of many new strains of plants

and new types of medicine depend on theavailability of wild species from which geneticresources can be drawn.


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Opposition to genetically modified food isgrowing.

Production of organically-produced food is

becoming more profitable as consumerare willing to pay a higher price.


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3) Pollution Concerns:

Pollution concerns are at the centre of the most

worries about the environment.(a) Businesses are under pressure to curtail the

impacts of their activities on the water tables,

seas and the oceans. Concern over thequality of drinking water in U.K. hasgenerated a massive increase in the size ofthe bottled water market in the U.K.


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(b) The quality of air has been much discussed.

(c) Concern about the pollution of land and the

long term damage wrought by industry to theland it occupies, is an other important issue.

(d) Noise pollution is also likely to becomeimportant and can impact the operation of allmanner of business.


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In order to take action to remedy these problemsthe Polluter pays principle was adopted by theOECD in early 1970s and now it has broadacceptance.

Pap aims to relate the damage done by

pollution involved in the production of goodsand services to the prices of these goods.


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The intention is to deter potential pollutersby making it uneconomic to produce goodsand services that create pollution.

This principle has been broadly accepted andhas been a major factor. In reaction to majorpollution incidents such as large scale oil andchemical spills.


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4) Acid rains:

Damaged forests throughout northern Europe and

acidification of water supplies and fish-bearinglakes and rivers.

Not possible to establish direct culpability

(Swedish farmers)

Bills involved are large and political pressure toconstrain the effects of industrial production haveincreased enormously.


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5) Ozone depletion:

Ozone layer has been depleted becauseof pollution

Some solvents used in electronics industry

and coolants in refrigerators are a threat tothe ozone layer.

These are being banned now.


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6) Waste:

Example include nuclear waste from powerstations, industrial waste and domesticwaste.

National government are doing legislation tohandle the waste.

There are also international agreementsabout the effects of dumping waste on themarine life and on beaches.


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7) Climatic Change:Excess of CO2 in the air can produce unnatural weather.

Consequences include average worldtemperature and sea level rising. Disastrous

for agriculture and low lying areas.

The Kyoto Treaty of 1997 was an attempt


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to control pollution of the environment by

emission of the greenhouse gases such as

Chlorofluorocarbons (CFCs) which can causepotentially damaging weather.

Treaty binds industrial nations to reduce

emissions by an average of 5.2% below 1990level over the next decade. USA withdrewfrom the treaty in March 2001.


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8) Energy Resources:

There are concerns about the usage ofenergy resources.

Some energy resources are yielding farless of their potential than possible. Forexample, coal.

Energy saving programs are underway inmost of the developing countries.


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New energy efficient products are beingdeveloped.

Legislations is required to limit the use of

certain scarce and dangerous resources.A carbon tax, for example can help.


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SOCIAL RESPONSIBILITYOF ORGANIZATIONS

Social responsibility is expected from allorganizations, be they businesses, governments,universities and colleges, or religious institutions.


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SOCIAL RESPONSIBILITYSOCIAL RESPONSIBILITY OF BUSINESS

One school of thought argues that management

of a business has only one social responsibilityand that is to maximize wealth for its share

holders.

There are two reasons given to support this

view.


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SOCIAL RESPONSIBILITY

1) Businesses is owned by shareholders so itis their right that they be given maximumreturn and revenue should not be wasted

on other activities.

2) Managements job is to maximize wealth,

as this is the best way that society canbenefit from a business activity.


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It will increase tax revenue.

Increased wealth may have the trickle downeffect.

Many companies share are owned bypension funds whose ultimate beneficiaries maynot be wealthy persons.

HOW ????


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An other school of thought argues that the aim

of the business is not only to maximize wealth

( to make money) but it is also binding upon

them to give something back to society; so their

business should be RESOPONSIBLE

BUSINESS.

This school supports its view by giving some

arguments.


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SOCIAL RESPONSIBILITY1) In practice organizations are rarely controlled

effectively by shareholders. Most shareholders are passive investors.

2) Large corporations can manipulate markets.Social responsibility, forced or voluntary is away of recognizing this.

3) Businesses do receive a lot of governmentsupport. The public pays for infrastructure.


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Businesses pay tax but public pays through

higher prices.

4) There are dire social consequences of the

activities of the firms ( increased traffic,

pollution, stress) which are inflicted on the

wider population.


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The arguments for and against the social

responsibility of organizations although complex

can be traced to different assumptions about thesociety and the relationships between the

individuals and organizations within it.


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If the stakeholder concept of business is held

then the public is also a stake holder.

Business will only succeed if it is part

of a wider society. Giving to charity is oneway of encouraging a relationship.


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Charitable donations and artistic sponsorships

are a useful medium of public relations andcan reflect well on business. It is just like an

other form of promotion which can enhance

consumer awareness of the business. ( Its aninvestment)


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A very strong argument for social responsibility

is Market Failure.

Market failure refers to a situation in which a

free market mechanism fails to produce the

most efficient allocation of resources.


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Profit maximization may be an important

corporate motive but the fact that profits are

made by incurring cost borne by the societymake social responsibility obligatory for the

organizations.


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SOCIAL RESPONSIBILITYThe principal causes of market failure are

considered below.

(a) Imperfections in the market(b) Divergence between private costs and

social costs.

(c) The existence of public goods.(d) The need to consider non-market goals,

such as social justice


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(a) Imperfections in the world

Factories causing pollution dont have to

compensate nearby residents for the cost ofcleaning their buildings.

Employers dont have to pay for work practiceswhich leave their workers feeling unfulfilled,

stressed and pressured. Car manufacturers dont have to pay for the

cost of road congestion which results fromthe sale of more cars.


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(b) Social costs and private costs

In a free market, producers

and consumers make output and buying decisions

for their own private benefit and these decisions

determine how the economys resources will be

allocated to production and consumption. Private

and social costs determine what goods are made &bought in a free market.


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Private cost- cost to the firm of resources used

Social cost- cost to the society as a whole, of

resources used by a firm

Private benefit- benefits obtained directly by a

consumer or a producer

Social benefit- total benefits obtained directly or

indirectly by suppliers & consumers

SOC S O S


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SOCIAL RESPONSIBILITYWhen private & social costs or private & social

benefits are not the same, such an allocation ofresources will occur that will be not socially

acceptable to the society.

Private cost not equal to social cost

1) Emission of pollution during production-private

cost not equal to social cost.2) A firm produces a good -private cost not equal

to social cost.


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SOCIAL RESPONSIBILITYPrivate benefit not equal to social benefit

Musicians being hired at a local restaurant.(private benefit not equal to social benefit)

Employees sent on training by a firm-(private benefit not equal to social benefit)


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(C) Public goodsThe production of such goods are

provided by the state. Every one can use publicgoods. Its available for every one and it is almostimpossible to exclude anyone from its use.

In a free market individuals benefiting from public

goods will have no incentive paying for them. Theymight as well be free riders, while other continueto pay for it.


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(d) Social Justice

The firm makes money bydoing business in the society. Its part ofthe society and not an alien entity. Its onlyfair that the business pays something backto the society with out whom it cant exist.


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SOCIAL RESPONSIBILITYThe existence of market failure and externalitiessuggest the need for intervention by thegovernment , in order to improve the allocationof resources

Merit and demerit goods

Merit goods are considered to be

worth providing in greater volume than needed inthe market because of its long term public interest.Education is one example.


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Demerit goods are those goods that government

want to see consumed less because of its

harmful long term effects for the society.

Examples include tobacco.

Lec 4-Responsible Business

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