8/10/2019 127646150-Chap-009 http://slidepdf.com/reader/full/127646150-chap-009 1/41 Chapter 09 - Business the Environment and Sustainability Chapter 09 Business the Environment and Sustainability True/False Questions 1. (p. 372) The trend of sustainable businesses and sustainable economic development has shifted towards the Triple Bottom Line approach in recent times. TRUE Sustainable business and sustainable economic development seek to create new ways of doing business in which business success is measured in terms of economic, ethical, and environmental sustainability, often called the Triple Bottom Line approach. AACSB: 1 BT: Knowledge Difficulty: Easy Learning Objective: 1 2. (p. 374) The natural world, like capital, had the productive capacity to produce long-term income but only if used prudently. TRUE The natural world, like capital, had the productive capacity to produce long-term income but only if used prudently. Difficulty: Easy 9-1
Chapter 09 - Business the Environment and Sustainability
Chapter 09
Business the Environment and Sustainability
True/False Questions
1. (p. 372) The trend of sustainable businesses and sustainable economic development has
shifted towards the Triple Bottom Line approach in recent times.
TRUE
Sustainable business and sustainable economic development seek to create new ways of doing
business in which business success is measured in terms of economic, ethical, andenvironmental sustainability, often called the Triple Bottom Line approach.
AACSB: 1
BT: Knowledge
Difficulty: Easy
Learning Objective: 1
2. (p. 374) The natural world, like capital, had the productive capacity to produce long-term
income but only if used prudently.
TRUE
The natural world, like capital, had the productive capacity to produce long-term income but
Chapter 09 - Business the Environment and Sustainability
11. (p. 382) Norman Bowie's philosophy that businesses were not obligated to practice
environmental responsibility underestimates the influence that businesses have in establishing
the law.
TRUE
Bowie argued that, apart from the duties to cause no avoidable harm to humans and to obeythe law, business has no special environmental responsibility. Business may voluntarily
choose to do environmental good, but it has no obligation to do so. This approach
underestimates the influence that business can have in establishing the law.
Chapter 09 - Business the Environment and Sustainability
12. (p. 383) The three pillars of sustainability include goals to achieve economic, environmental,
and competitive sustainability.
FALSE
The three goals, economic, environmental, and ethical sustainability, are often referred to as
the three pillars of sustainability.
AACSB: 3
BT: Knowledge
Difficulty: Easy
Learning Objective: 6
13. (p. 384) The ‘circular flow model' explains the nature of economic transactions in terms ofthe flow of resources from businesses to households and back again.
TRUE
What is sometimes called the "circular flow model" explains the nature of economic
transactions in terms of a flow of resources from businesses to households and back again.
AACSB: 2
BT: Knowledge
Difficulty: Medium
Learning Objective: 6
14. (p. 385) The circular flow model differentiates natural resources from the other factors of
production.
FALSE
The circular flow model does not differentiate natural resources from the other factors of
Chapter 09 - Business the Environment and Sustainability
23. (p. 377) In economic terms, all resources are infinite. Why?
A. Since all resources can be replaced by substitutes, i.e., they are ‘fungible'.
b. Since governmental regulations will ensure that resources are distributed fairly.
c. The advent of technology will ensure that all resources are recyclable.d. Since efficient markets will distribute resources efficiently and with care.
The free market also provides an answer for resource conservation. From a strict market
economic perspective, resources are "infinite." In economic terms, all resources are
"fungible." They can be replaced by substitutes, and in this sense resources are infinite.
AACSB: 3
BT: Knowledge
Difficulty: Medium
Learning Objective: 3
24. (p. 378) The fact that future generations, neighbors, etc. will bear the brunt of environmental
pollution, it goes to show that market failure can occur through means of
a. lack of ability to create a price for important social goods.
B. the existence of externalities.
c. the distinction between individual decisions and group decisions.
d. the distinction between individual decisions and group consequences.
One reason for market failure is the existence of externalities, an example for which is
environmental pollution. Since the "costs" of such things as air pollution, groundwater
contamination and depletion, soil erosion, and nuclear waste disposal are typically borne by
parties "external" to the economic exchange, free market exchanges cannot guarantee optimal
Chapter 09 - Business the Environment and Sustainability
27. (p. 382 – 383) All of the following are inadequacies associated with Norman Bowie's view of
corporate social and environmental responsibility except that
a. it underestimates the influence business has in establishing the law.
B. it contends that environmental protection will extend further than legal jurisdictions.c. it underestimates the ability of business to influence consumer choice.
d. it assumes that economic growth is environmentally and ethically benign.
If we rely on the law to protect the environment, environmental protection will extend only as
far as the law extends. Yet, most environmental issues, pollution problems especially, do not
respect legal jurisdictions.
AACSB: 2, 3
BT: Knowledge Difficulty: Medium
Learning Objective: 5
28. (p. 383) Advertising is a $200 billion a year industry in the United States alone. What does
this prove?
a. Business can influence the establishment of the law.
b. Environmental protection extends only as far as the law extends.
C. Business can influence consumer choice.
d. Economic growth is environmentally and ethically benign.
Advertising is a $200 billion a year industry in the United States alone. It is surely misleading
to claim that business passively responds to consumer desires and that consumers are
Chapter 09 - Business the Environment and Sustainability
Essay Questions
57. (p. 374 – 375) Describe the characteristics of the conservation movement. Explain the spiritual
aspect of the need to conserve the environment.
By the late 19th century, humans came to recognize the self-interested reasons for protecting
the natural environment. The conservation movement, the first phase of modern
environmentalism, advocated a more restrained and prudent approach to the natural world.
From this perspective, the natural world was still valued as a resource, providing humans with
both direct benefits (air, water, food), and indirect benefits (the goods and services produced
by business).
Conservationists argued against the exploitation of natural resources as if they could providean inexhaustible supply of material. They made the case that business had good reasons for
conserving natural resources, reasons that paralleled the rationale to conserve financial
resources. The natural world, like capital, had the productive capacity to produce long-term
income but only if managed and used prudently.
Besides the obvious reasons to protect human life and health, the natural environment is
essential and valuable for many other reasons. Often, these other values conflict with the more
direct instrumental value that comes from treating the natural world as a resource. The beauty
and grandeur of the natural world provide great aesthetic and inspirational value. Many
people view the natural world as a manifestation of religious and spiritual values. Parts of the
natural world can have symbolic value, historical value, and such diverse psychologicalvalues as serenity and exhilaration. These values can clearly conflict with the use of the earth
itself as a resource to physically, as opposed to spiritually, sustain those who live on it.
Chapter 09 - Business the Environment and Sustainability
58. (p. 375 – 376) Distinguish between the two approaches to the aspect of moral status being
assigned to animals.
The moral status of animals has been the environmental value that, arguably, has raised thegreatest challenge to business. Variously referred to as the animal rights, animal liberation, or
animal welfare movement, this approach attributes a moral standing to animals. Such a status
would create a wide variety of distinctive ethical responsibilities concerning how we treat
animals and would have significant implications for many businesses. Two versions of this
perspective are worth mentioning.
The first approach emphasizes the fact that many animals, presumably all animals with a
central nervous system, have the capacity to feel pain. Reminiscent of the utilitarian tradition,
this view asserts an ethical responsibility to minimize pain. Inflicting unnecessary pain is
taken to be an ethical wrong; therefore, acts that inflict unnecessary pain on animals are
ethically wrong. Raising and slaughtering animals for food, particularly in the way industrial
farming enterprises raise poultry, hogs, and cattle, would be an obvious case in which
business would violate this ethical responsibility.
A second approach argues that at least some animals have the cognitive capacity to possess a
conscious life of their own. Reminiscent of the Kantian ethical tradition, this view asserts that
we have a duty not to treat these animals as mere objects and means to our own ends. Again,
businesses that use animals for food, entertainment, or pets would violate the ethical rights of
Chapter 09 - Business the Environment and Sustainability
59. (p. 376 – 377) Enumerate upon the features of approaching environmental responsibilities from
the perspective of efficient markets.
If the best approach to environmental concerns is to trust them to efficient markets, then theresponsible business manager simply ought to seek profits and allow the market to allocate
resources efficiently. By doing this, business fills its role within a market system, which in
turn serves the greater overall (utilitarian) good. Defenders of the market approach contend
that environmental problems are economic problems that deserve economic solutions.
Fundamentally, environmental problems involve the allocation and distribution of limited
resources. Whether we are concerned with the allocation of scarce nonrenewable resources
such as gas and oil, or with the earth's capacity to absorb industrial by-products such as CO 2
or PCBs, efficient markets can address environmental challenges.
According to William Baxter, society could strive for pure air and water, but the costs (lost
opportunities) that this would entail would be too high. A more reasonable approach is to aim
for air and water quality that is safe enough to breathe and drink without costing too much.
This balance, the "optimal level of pollution" can be achieved through competitive markets.
The free market also provides an answer for resource conservation. From a strict market
economic perspective, resources are "infinite." As the supply of any resources decreases, the
price increases, thereby providing a strong incentive to supply more or provide a less costly
substitute. In economic terms, all resources are "fungible." They can be replaced by
substitutes, and in this sense resources are infinite.
A similar case can be made for the preservation of environmentally sensitive areas.
Preservation for preservation's sake would be wasteful since it would use resources
Chapter 09 - Business the Environment and Sustainability
60. (p. 378 – 380) Discuss the challenges associated with the efficient market approach to
environmental responsibilities.
A variety of market failures involving environmental issues, point to the inadequacy ofmarket solutions. Since the "costs" of such things as air pollution, groundwater contamination
and depletion, soil erosion, and nuclear waste disposal are typically borne by parties
"external" to the economic exchange (e.g., people downwind, neighbors, and future
A second type of market failure occurs when no markets exist to create a price for important
social goods. Endangered species, scenic vistas, rare plants and animals, and biodiversity are
just some environmental goods that typically are not traded on open markets. Public goods
such as clean air and ocean fisheries also have no established market price. With no
established exchange value, the market approach cannot even pretend to achieve its own goals
of efficiently meeting consumer demand. Markets alone fail to guarantee that such important
public goods are preserved and protected.
A third way in which market failures can lead to serious environmental harm involves a
distinction between individual decisions and group consequences. We can miss important
ethical and policy questions if we leave policy decisions solely to the outcome of individual
decisions. Because these are important ethical questions, and because they remain unasked
from within market transactions, we must conclude that markets are incomplete (at best) in
their approach to the overall social good.
There are good reasons for thinking that such ad hoc attempts to repair market failures are
environmentally inadequate. One important reason is what has been called the first-generation
problem. Markets can work to prevent harm only through information supplied by the
existence of market failures. That is, we learn about market failures and thereby preventharms in the future only by sacrificing the "first generation" as a means of gaining this
information. When public policy involves irreplaceable public goods such as endangered
species, rare wilderness areas, and public health and safety, such a reactionary strategy is ill
Chapter 09 - Business the Environment and Sustainability
62. (p. 382) Discuss how businesses and societies had opportunities to establish business's
environmental responsibilities. Discuss Norman Bowie's interpretation.
Government established regulatory standards to try to prevent the occurrence of pollution orspecies extinction rather than to offer compensation after the fact. We can think of these laws
as establishing minimum standards to ensure air and water quality and species preservation.
Business was free to pursue its own goals as long as it complied with the side constraints
these minimum standards established. The consensus that emerged was that society had two
opportunities to establish business's environmental responsibilities. As consumers, individuals
could demand environmentally friendly products in the marketplace. As citizens, individuals
could support environmental legislation. As long as business responded to the market and
obeyed the law, it met its environmental responsibilities.
Philosopher Norman Bowie defended a modified version of this narrow view of corporate
social responsibility. Bowie argued that, apart from the duties to cause no avoidable harm to
humans and to obey the law, business has no special environmental responsibility. Business
may voluntarily choose to do environmental good, but it has no obligation to do so. Business
should be free to pursue profits by responding to the demands of the economic marketplace
without any particular regard to environmental responsibilities. In so far as society desires
environmental goods (for example, lowering pollution by increasing the fuel efficiency of
automobiles), it is free to express those desires through legislation or within the marketplace.
Absent those demands, business has no special environmental responsibilities.
Chapter 09 - Business the Environment and Sustainability
63. (p. 382 – 383) Describe the challenges associated with Norman Bowie's approach to corporate
environmental responsibility.
Several problems suggest that this approach will prove inadequate over the long term. First, itunderestimates the influence that business can have in establishing the law. The Corporate
Automotive Fuel Efficiency (CAFE) standards provide a good example of how this can occur.
A reasonable account of this law suggests that the public very clearly expressed a political
goal of improving air quality by improving automobile fuel efficiency goals (and thereby
reducing automobile emissions). However, the automobile industry was able to use its
lobbying influence to exempt light trucks and SUVs from these standards.
Second, this approach also underestimates the ability of business to influence consumer
choice. To conclude that business fulfills its environmental responsibility when it responds to
the environmental demands of consumers is to underestimate the role that business can play in
shaping public opinion. The best example would be the advertising industry. Assuming that
business is not going to stop advertising its products or lobbying government, this model of
corporate environmental responsibility is likely to prove inadequate for protecting the natural
environment.
Further, if we rely on the law to protect the environment, environmental protection will
extend only as far as the law extends. Yet, most environmental issues, pollution problems
especially, do not respect legal jurisdictions. Similarly, national regulations will be ineffective
for international environmental challenges.
Finally, and perhaps most troubling from an environmental standpoint, this regulatory model
assumes that economic growth is environmentally and ethically benign. Regulations establish
side constraints on business's pursuit of profits and, as long as they remain within those
constraints, accept as ethically legitimate whatever road to profitability management chooses.
Chapter 09 - Business the Environment and Sustainability
64. (p. 384 – 385) Introduce Herman Daly's concepts of sustainable development. Describe the
circular flow model in detail.
Economist Herman Daly has been among the leading thinkers who have advocated aninnovative approach to economic theory based on the concept of sustainable development.
Daly makes a convincing case for an understanding of economic development that transcends
the more common standard of economic growth. Unless we make significant changes in our
understanding of economic activity, unless quite literally we change the way we do business,
we will fail to meet some very basic ethical and environmental obligations. According to
Daly, we need a major paradigm shift in how we understand economic activity.
We can begin with the standard understanding of economic activity and economic growth
found in almost every economics textbook. What is sometimes called the "circular flow
model" explains the nature of economic transactions in terms of a flow of resources from
businesses to households and back again.
Two aspects of this circular flow model are worth noting. First, it does not differentiate
natural resources from the other factors of production. This model does not explain the origin
of resources. They are simply owned by households from which they, like labor, capital, and
entrepreneurial skill, can be sold to business. Services can be provided in many ways and by
substituting different factors of production. In Simon's terms, resources can therefore be
treated as "infinite."
A second observation is that this model treats economic growth as both the solution to all
social ills and also as boundless. To keep up with population growth, the economy must grow.
To provide for a higher standard of living, the economy must grow. To alleviate poverty,
hunger, and disease, the economy must grow. The possibility that the economy cannot grow
Chapter 09 - Business the Environment and Sustainability
65. (p. 388 – 389) Briefly describe the reasons supporting the practice of sustainability within
businesses.
First, sustainability is a prudent long-term strategy: business will need to adopt sustainablepractices to ensure long-term survival. Firms that fail to adapt to the converging lines of
decreasing availability of resources and increasing demand risk their own survival.
Second, the huge unmet market potential among the world's developing economies can only
be met in sustainable ways. Enormous business opportunities exist in serving the billions of
people who need, and are demanding, economic goods and services. The base of the
economic pyramid represents the largest and fastest-growing economic market in human
history. Yet, the sheer size of these markets alone makes it impossible to meet this demand
with the environmentally damaging industrial practices. It is obvious that new sustainable
technologies and products will be required to meet these demands.
Third, significant cost savings can be achieved through sustainable practices: Business stands
to save significant costs in moves towards ecoefficiency. Savings on energy use and materials
will reduce not only environmental wastes, but spending wastes as well. Minimizing wastes
makes sense on financial grounds as well as on environmental grounds.
Fourth, competitive advantages exist for sustainable businesses: Firms that are ahead of the
sustainability curve will both have an advantage serving environmentally conscious
consumers and enjoy a competitive advantage attracting workers who will take pride and
satisfaction in working for progressive firms.
Finally, sustainability is a good risk management strategy: Refusing to move towards
sustainability offers many downsides that innovative firms will avoid. Avoiding future
government regulation is one obvious benefit. Avoiding legal liability for unsustainable
products is another potential benefit. Consumer boycotts of unsustainable firms are also a riskto be avoided.
Chapter 09 - Business the Environment and Sustainability
66. (p. 390) Explain the concept of ecoefficiency, biomimicry and cradle-to-cradle
responsibility.
Ecoefficiency has long been a part of the environmental movement. "Doing more with less"has been an environmental guideline for decades. Some estimates suggest that with present
technologies alone, business could readily achieve at least a fourfold increase in efficiency
and perhaps as much as a tenfold increase. Consider that a fourfold increase, called "Factor-
Four" in the sustainability literature, would make it possible to achieve double the
productivity from one-half the resource use.
Just as biological processes such as photosynthesis cycle the "waste" of one activity into the
resource of another, this principle is often referred to as biomimicry. The ultimate goal of
biomimicry is to eliminate waste altogether rather than reducing it. If we truly mimic
biological processes, the end result of one process (e.g., leaves and oxygen produced by
photosynthesis) is ultimately reused as the productive resources (e.g., soil and water) of
another process (plant growth) with only solar energy added. The evolution of business
strategy towards biomimicry can be understood along a continuum. The earliest phase has
been described as "take-make-waste." Business takes resources, makes products out of them,
and discards whatever is left over. A second phase envisions business taking responsibility for
its products from "cradle to grave." Sometimes referred to as "life-cycle" responsibility, this
approach has already found its way into both industrial and regulatory thinking.
Cradle-to-grave, or life-cycle, responsibility holds that a business is responsible for the entire
life of its products, including the ultimate disposal even after the sale. It extends this idea even
further and holds that a business should be responsible for incorporating the end results of its
products back into the productive cycle. This responsibility, in turn, would create incentives
to redesign products so that they could be recycled efficiently and easily.
Chapter 09 - Business the Environment and Sustainability
67. (p. 373) Explain the first aspect of the contemporary environmental reality which underlines
the need for self-interested reasoning.
Past human societies have often run up against the limits of the local environment's ability tosustain human life. In these historical cases, environmental degradation has been localized to
a particular region and has seldom affected more than a generation. In contrast, some
contemporary environmental issues have the potential to adversely affect the entire globe and
change human life forever. Global climate change, species extinction, soil erosion and
desertification, and nuclear wastes will threaten human life into the indefinite future.
AACSB: 2, 3
BT: Knowledge
Difficulty: Medium
Learning Objective: 1
68. (p. 377) What is the concept of optimal level of pollution?
William Baxter argued that there is an optimal level of pollution that would best serve
society's interests. This optimal level is best attained, according to Baxter, by leaving it to a
competitive market. Denying that there is any "natural" or objective standard for clean air or
water (as this view would deny there is an objective state of perfect health), Baxter begins
with a goal of "safe" air and water quality, and translates this goal to a matter of balancing
risks and benefits. A more reasonable approach is to aim for air and water quality that is safe
enough to breathe and drink without costing too much. This balance, the "optimal level ofpollution" can be achieved through competitive markets.
Chapter 09 - Business the Environment and Sustainability
70. (p. 383) Explain how relying on the law will result in environmental protection extending
only as far as the law extends with an example.
Most environmental issues, pollution problems especially, do not respect legal jurisdictions.New York State might pass strict regulations on smokestack emissions, but if the power plants
are located downwind in Ohio or even further west in the Dakotas or Wyoming, New York
State will continue to suffer the effects of acid rain. Similarly, national regulations will be
ineffective for international environmental challenges. While hope remains that international
agreements might help control global environmental problems, the failure of the Kyoto
agreement suggests that this might be overly optimistic.
AACSB: 3
BT: Comprehension Difficulty: Medium
Learning Objective: 5
71. (p. 383 – 384) Why was the Brundtland Commission formed?
The concept of sustainable development can be traced to a 1987 report from the United
Nations' World Commission on Environment and Development (WCED), more commonly
known as the Brundtland Commission, named for its chair, Gro Harlem Brundtland. The
commission was charged with developing recommendations for paths towards economic and
social development that would not achieve short-term economic growth at the expense of
long-term environmental and economic sustainability. The Brundtland Commission offeredwhat has become the standard definition of sustainable development. "Sustainable
development is development that meets the needs of the present without compromising the
ability of future generations to meet their own needs."
Chapter 09 - Business the Environment and Sustainability
72. (p. 386) How does Herman Daly prove that the classical model will prove unstable if
resources move at a pace faster than the productive capacity of the earth?
Daly argues that neoclassical economics, with its emphasis on economic growth as the goal of economic policy, will inevitably fail to meet these challenges unless it recognizes that the
economy is but a subsystem within earth's biosphere. Economic activity takes place within
this biosphere and cannot expand beyond its capacity to sustain life. All the factors that go
into production—natural resources, capital, entrepreneurial skill, and labor—ultimately
originate in the productive capacity of the earth. In light of this, the entire classical model will
prove unstable if resources move through this system at a rate that outpaces the productive
capacity of the earth or of the earth's capacity to absorb the wastes and by-products of this
production.
AACSB: 2, 3
BT: Knowledge
Difficulty: Hard
Learning Objective: 6
73. (p. 386 – 387) Explain Herman Daly's economic system model (sustainable model).
First, the model recognizes that the economy exists within a finite biosphere that encompasses
a band around the earth that is little more than a few miles wide. From the first law of
thermodynamics (the conservation of matter/energy), we recognize that neither matter nor
energy can truly be "created," it can only be transferred from one form to another. Second,energy is lost at every stage of economic activity. Consistent with the second law of
thermodynamics (entropy increased within a closed system), the amount of usable energy
decreases over time. "Waste energy" is continuously leaving the economic system and thus
new low-entropy energy must constantly flow into the system. Third, this model no longer
treats natural resources as an undifferentiated and unexplained factor of production emerging
from households. Finally, it recognizes that wastes are produced at each stage of economic
activity and these wastes are dumped back into the biosphere.
Chapter 09 - Business the Environment and Sustainability
74. (p. 389) List the general principles that will guide the movement of businesses towards
sustainability.
The precise implications of sustainability will differ for specific firms and industries, but threegeneral principles will guide the move towards sustainability. Firms and industries must
become more efficient in using natural resources; they should model their entire production
process on biological processes; and they should emphasize the production of services rather
than products.
AACSB: 3
BT: Knowledge
Difficulty: Easy
Learning Objective: 7
75. (p. 390) Explain with an example, how ecoefficiency can be implemented on an individual
and a business scale.
"Doing more with less" has been an environmental guideline for decades. On an individual
scale, it is environmentally better to ride a bike than to ride in a bus, to ride in a fuel-cell or
hybrid-powered bus than in a diesel bus, to ride in a bus than to drive a personal automobile,
and to drive a hybrid car than an SUV. Likewise, business firms can improve energy and
materials efficiency in such things as lighting, building design, product design, and
Chapter 09 - Business the Environment and Sustainability
76. (p. 391) Explain the third sustainable business principle, beyond ecoefficiency, and
biomimicry.
Beyond ecoefficiency and biomimicry, a third sustainable business principle involves a shiftin business model from products to services. Traditional economic and managerial models
interpret consumer demand as the demand for products—washing machines, carpets, lights,
consumer electronics, air conditioners, cars, computers, and so forth. A service-based
economy interprets consumer demand as a demand for services—for clothes cleaning, floor
covering, illumination, entertainment, cool air, transportation, word processing, and so forth.
