ACCA Applied Knowledge · Business and Technology · Sustainable business practices
A chemical company's factory discharges waste into a river. The cost of cleaning the river is borne by the local community and not by the company. How is this cost described?
The cost is a negative externality. It is a cost created by the company's activity but borne by third parties, here the local community, rather than by the company itself, so it does not appear in the company's own financial statements.
- AA negative externalityCorrect
- BA fixed overhead of the company
- CA contingent liability of the company
Explanation
An externality is a cost or benefit that falls on third parties outside the transaction. Because the community bears the clean-up cost, it is a negative externality. It is not a company overhead or liability, because the company does not bear it.
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