ACCA Applied Knowledge · Business and Technology · Sustainable business practices
A manufacturer discharges waste into a river, and the clean-up cost is borne by the local community rather than by the manufacturer. How is this cost best described?
This is an external cost, or negative externality. The manufacturer causes the pollution but the community bears the clean-up cost, so the cost is not reflected in the manufacturer's own accounts. Sustainability accounting and regulation try to make such costs visible or force the polluter to bear them.
- AAn internal cost
- BA sunk cost
- CAn external cost (externality)Correct
- DA opportunity cost of capital
Explanation
A cost imposed on third parties and not paid by the business causing it is an external cost or negative externality. An internal cost would be borne by the manufacturer itself; sunk and capital opportunity costs are unrelated concepts.
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