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ACCA Applied Knowledge · Business and Technology · Environmental and sustainability factors

Which of the following is the best description of an externality in the context of a business's environmental impact?

An externality is a cost or benefit caused by a business's activities that falls on third parties, such as pollution harming local residents, and is not reflected in the business's own accounts or prices.

  1. AA cost or benefit arising from a business's activities that falls on third parties and is not reflected in the business's own accountsCorrect
  2. BA cost that the business pays to an external auditor for verifying its environmental report
  3. CA tax charged by government on all imported goods used in production
  4. DA benefit that a business obtains only from its own shareholders

Explanation

An externality is a spillover cost or benefit borne by parties outside the transaction, such as pollution affecting local residents. The business does not normally record or pay for it. The audit fee and import tax options describe ordinary business costs, not externalities.

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