Business and the Political Environment (AQA A-Level Business): Revision Notes
Business and the Political Environment
Introduction to government policy
A government policy is a planned course of action designed to bring about change. Government policies have a significant impact on how businesses operate, covering areas such as enterprise support, regulation, infrastructure, environmental protection, and international trade.
Government policies shape the business environment by creating the rules, incentives, and infrastructure that businesses need to operate effectively. Understanding these policies is essential for making informed business decisions.
Government policies encourage enterprise
The UK government actively promotes enterprise (the creation and running of businesses) because it brings substantial benefits to the economy. New businesses generate employment opportunities and create new jobs. The government focuses particularly on supporting enterprise in areas that require economic regeneration, providing fresh opportunities for new businesses to develop and thrive.
Business Enterprise policy
The government has developed a comprehensive Business Enterprise policy that outlines various strategies to support entrepreneurs:
Government schemes enable businesses to access finance:
- These schemes allow enterprises to borrow money at low interest rates
- They encourage private investment in businesses
- The Angel Cofund provides matched funding to support businesses
- The Enterprise Investment Scheme is a government initiative offering tax incentives to people who invest in small businesses
Finance schemes remove one of the biggest barriers for new businesses: access to capital. By making funding more affordable and accessible, the government helps more entrepreneurs turn their ideas into viable businesses.
Support for small businesses includes:
- Small businesses benefit from exemptions on business rates (a type of property tax)
- The Employment Allowance reduces a business's National Insurance contributions bill by £2,000 annually
- This helps small businesses manage their costs more effectively during their crucial early stages
Information and guidance resources:
- The Great Business website has been launched to advise people on setting up and running a business
- It provides practical guidance on all aspects of business management
Initiatives to encourage young entrepreneurs:
- The government backs various programmes to support young entrepreneurs
- For example, the Tenner Challenge gives young people £10 to start a business
- Participants can see how much profit they can generate in a month
- This hands-on experience helps young people develop entrepreneurial skills
Practical Example: The Tenner Challenge
A group of students receives £10 and decides to start a cake-baking business:
- Initial investment: £10 (government-provided)
- Spend on ingredients: £8
- Make: 30 cupcakes
- Sell at: £1 each = £30 revenue
- Total profit: £30 - £8 = £22 profit in one month
This demonstrates how even small amounts of capital can generate returns with entrepreneurial thinking.
Many industries need regulation
Privatisation and the need for regulation
During the 1980s, the UK government sold many state-owned firms into the private sector. The primary aims were to improve efficiency and enable these businesses to make a profit. Notable examples include British Telecom, British Gas, British Steel, and various water companies.
Natural monopolies require special oversight
Some industries are natural monopolies. These are sectors where:
- Competition is impractical or extremely difficult
- For example, you wouldn't want several sets of rail tracks from one city to another
- Similarly, having multiple sets of water pipes and sewer pipes would be wasteful and inefficient
When privatising a natural monopoly like the railways or water industry, the government must establish regulations. These rules prevent the new private owners from exploiting their dominant position by raising prices excessively or cutting quality standards.
Example: Water industry privatisation
In 1989, the UK government privatised the ten regional water authorities in England and Wales. This involved selling assets such as reservoirs. For instance, the water authority providing services to north-east England was taken over by Northumbrian Water Limited.
Worked Example: Water Industry Regulation Framework
When the water industry was privatised, the government created a multi-layered regulatory system:
Regulatory Body 1 - Ofwat:
- Role: Economic regulator
- Key function: Setting limits on how much water companies can charge customers
- Purpose: Ensuring fair pricing for consumers
Regulatory Body 2 - Drinking Water Inspectorate:
- Role: Quality regulator
- Key function: Monitor drinking water quality standards
- Purpose: Ensure water is safe for consumption
Legal Framework - Water Industry Act 1991:
- Provides the overall legal structure
- Sets out laws about the duties and responsibilities of water companies
- Defines what water companies can and cannot do
This three-tier system ensures privatised water companies serve the public interest while operating as private businesses.
Regulated industries affect business decisions
There are many regulated industries in the UK. The regulations within these sectors influence the decision making of all businesses operating in that industry.
For example, HR decisions on staffing levels at residential care homes for elderly residents are influenced by the Care Quality Commission. This regulatory body sets standards that must be met, affecting operational decisions.
Infrastructure is vital to businesses
What is infrastructure?
The UK's infrastructure consists of physical things such as:
- The transport network, including roads, railways, and ports
- Pipes and wires that enable the movement of water, energy, and information
These physical systems form the backbone that allows the economy to function effectively.
Benefits of infrastructure improvements
Improvements in infrastructure are good for the economy because they make businesses more productive. Benefits include:
Enhanced business operations:
- Businesses can move goods and raw materials more efficiently and quickly
- Data and information can be transferred more rapidly through improved broadband networks
Why Infrastructure Matters
Think of infrastructure as the circulatory system of the economy. Just as blood vessels carry oxygen and nutrients to cells, infrastructure carries goods, people, energy, and information to businesses. Better infrastructure means this circulation happens more efficiently.
Job creation:
- In the short term, infrastructure improvements create jobs directly
- For example, constructing new roads requires workers and generates employment
Long-term economic growth:
- Better infrastructure helps businesses operate more efficiently
- This supports overall economic productivity and competitiveness
Government role in infrastructure
In the UK, it's mainly the private sector that manages and maintains infrastructure. However, the government has important oversight responsibilities:
Policy and planning:
- The government sets out its infrastructure priorities in the annual National Infrastructure Plan
- This document outlines what improvements are needed and where
Funding infrastructure projects:
- The government provides money for infrastructure projects through state funding
- Additionally, the government encourages private investment in infrastructure
- The UK Guarantees scheme reduces risk for private lenders
- Under this scheme, private investors will definitely get repaid if the project they're investing in fails
- This removes the risk for private investors, encouraging them to fund projects
Practical Example: Electric Vehicle Infrastructure
In 2015, the government promised £8 million to provide charge points at key locations across the UK for plug-in vehicles.
How this works:
- Investment: £8 million in public funding
- Purpose: Install charging stations at strategic locations
- Environmental benefit: Encourages people to use vehicles that reduce greenhouse gases
- Legal alignment: Aligns with what the Climate Change Act 2008 requires the government to do
- Economic benefit: Supports the transition to cleaner transportation and develops a new industry sector
This demonstrates how infrastructure investment can simultaneously address environmental goals, legal requirements, and economic development.
Government policies aim to protect the environment
Emissions trading system
The UK is part of the EU's Emissions Trading System. This system operates as follows:
How it works:
- The system gives greenhouse gas emissions allowances to certain businesses
- These include oil refineries, power stations, airlines, and many manufacturers (e.g., producers of metal, glass, and paper)
- Companies can trade their allowances, creating a market for emissions
The Market-Based Approach
If a company doesn't need all their allowance, they can sell some to a business that has run out. This creates an incentive for companies to choose greener processes. Companies that adopt cleaner technologies can profit from selling unused allowances.
This system uses market forces to encourage environmental responsibility—businesses that pollute less can earn money, while those that pollute more must pay for it.
Green subsidy schemes
The government offers various green subsidy schemes to encourage environmentally friendly practices:
Renewable Heat Incentive:
- This scheme pays businesses that use renewable energy to heat their buildings
- It makes sustainable heating options more financially viable
Resource efficiency programmes:
- The government and EU fund organisations that promote efficient use of raw materials
- For example, the Waste and Resources Action Programme (WRAP) works with businesses
- WRAP helps businesses achieve a circular economy
- A circular economy keeps resources in use for as long as possible
- This approach protects the environment while helping businesses save money
Practical Example: WRAP Initiative with Britvic™
Through a WRAP initiative, Britvic™ launched Robinsons Squash'd® in 2014. These are ultra-concentrated tiny bottles of squash.
Benefits achieved:
- Less packaging is required
- Less environmental impact from production and distribution
- Reduced transportation costs due to smaller, lighter products
How it works: Traditional squash bottles are diluted with water at the factory. Robinsons Squash'd® removes this water from the product, allowing consumers to add their own water at home. This means:
- Smaller bottles → less plastic
- Lighter products → lower fuel costs for transportation
- Fewer trucks needed → reduced carbon emissions
This demonstrates how environmental innovation can create both ecological and economic benefits.
Environment Agency
The Environment Agency is a government-sponsored organisation with the mission to protect and improve the environment. One key responsibility is to regulate businesses that release pollutants into water or land. This ensures environmental standards are maintained.
Legal requirements
Businesses that break environmental laws face serious consequences:
- They will be fined or prosecuted for violations
- Businesses must operate within environmental laws and EU directives
However, businesses can also benefit from government support:
- They can use government initiatives to help implement strategies reducing environmental impact
- This can help cut costs
- It can also improve their appeal to environmentally conscious consumers
Political changes can make international trade easier or harder
Tariffs
Tariffs are import taxes that discourage international trade. However, political changes can affect them:
Removing or reducing tariffs:
- This provides opportunities for businesses
- It makes international trade easier and cheaper
- Businesses can access new markets more affordably
The World Trade Organisation
The World Trade Organisation was established in 1995 to encourage international trade. Since its creation, the proportion of imports worldwide that are tariff-free has risen greatly. This has facilitated global commerce and created opportunities for businesses to expand internationally.
Quotas
Quotas are trade restrictions that governments use to put limits on imports or exports.
Purpose of quotas:
- Countries sometimes use import quotas to protect their own economies and jobs
- This approach is called a protectionist policy
Free trade agreements:
- Sometimes two or more countries sign agreements that remove (or reduce) the number of quotas between them
- These agreements encourage international trade
- For example, the EU and Chile entered into a free trade agreement in 2002
- Such agreements make it easier for businesses to trade internationally
UK and the European Union
Benefits of EU membership:
- Since the UK joined the European Union in 1973, British exports to EU countries have increased
- There are no quotas or tariffs within the EU
- Imports from other EU countries to Britain have also increased
Common Standards Benefit
EU countries also manufacture to increasingly common standards. This makes trade more straightforward. Businesses don't need to adapt products for different national requirements within the EU, reducing costs and complexity.
Trade embargoes and sanctions
Trade embargoes:
- A trade embargo bans trade with a particular country
- For example, the USA has had an embargo against Cuba since 1962
- Although in 2015, the US Government began to consider lifting or relaxing this restriction
Sanctions:
- Less extreme than embargoes, sanctions are imposed for various reasons
- They restrict certain types of trade or business activities
- For example, sanctions have been placed on Syria by the EU and USA
- This is due to concerns about that government's violent repressive regime
- Sanctions can significantly affect which countries a business can trade with
Trade embargoes and sanctions can suddenly close markets to businesses, affecting international operations and requiring companies to quickly find alternative suppliers or customers. Businesses engaged in international trade must stay informed about political developments that could impact their access to foreign markets.
Remember!
Key Points to Remember:
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Government enterprise policies support new businesses through schemes like the Angel Cofund, Enterprise Investment Scheme, and reduced business rates, creating jobs and stimulating economic regeneration.
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Privatisation of natural monopolies requires regulation to prevent exploitation—for example, Ofwat regulates water companies to protect consumers from unfair pricing.
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Infrastructure improvements (roads, railways, broadband) make businesses more productive, help goods and data move faster, and create both short-term jobs and long-term economic benefits.
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Environmental policies like the Emissions Trading System and green subsidies encourage businesses to adopt sustainable practices while potentially reducing costs through resource efficiency.
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International trade is influenced by political decisions—tariffs and quotas can restrict trade (protectionist policies), while free trade agreements and organisations like the WTO make international commerce easier and cheaper for businesses.