Externalities, Prospect Theory, and Social Construction: When Will Government Act, What Will Government Do?

Objectives. Political theories of agenda setting and policy choice are still limited in predicting when an issue will become salient and, once it has, what policy option will be used to address it. This article illustrates that for a large class of externality problems, perspectives from three other social science disciplines can refine those predictions. Methods. A synthesis of implications from economics on assignment of property rights, loss aversion from prospect theory, and image of the policy target from social construction is used to determine the conditions under which issues gain attention and the likely policy solutions. Results. Assignment of property rights establishes a baseline used to assess any further government actions, with losses from that base more likely to generate political attention. The assignment of rights also determines if a problem is defined as a negative or positive externality, which restricts the type of policies used to address the problem. This initial allocation of rights is in turn affected both by the political power and social construction of the groups involved. Conclusions. The result is a bias in policy attention and outcomes strongly influenced by the norms used in assignment of property rights, which typically favor those generating the negative externality.