A note to myself, but you're invited to listen in and comment if you'd like. [Update: comments glitch fixed.]
If I were teaching a first year legal “toolbox” course, I'd certainly teach Coase as part of it. And I'd include something like this too: Unenumerated: The Coase Theorem is false: contracts depend on tort law.
The proof that the Coase Theorem is false is actually quite simple: the assumptions of the Theorem contradict each other. The assumption that transactions are voluntary contradicts the assumption that any prior allocation of rights is possible, including rights that allow one party to coerce another. In fact, for the Theorem to at all make sense, a very large and crucial set of prior rights allocations must be excluded — namely any that allow any party to coerce another.
But we can't generally solve externalities problems by bargaining under this revised assumption. Externalities cannot be neatly distinguished from coercive acts, as extending one of Coase's own examples illustrates. In this example we have a railroad with a train that, passing by a farmer's wheat field, gives off sparks, which may start a fire in the field. In Coase's account, the prior allocation of rights might give the railroad the right to give off sparks, in which case the farmer must either plant his wheat far enough away from the railroad (wasting land) or buy the right to be free from sparks from the railroad. The prior allocation might instead already give the farmer the right to be completely free from sparks, in which case the railroad can either buy the right to emit sparks from the farmer or install spark-suppressors. If these are the two possible prior allocations of rights, Coase concluded that the railroad and the farmer will in the absence of transaction costs bargain to the most economically efficient outcome: if it costs less for the railroad to reduce the sparks than for the farmer to keep an unplanted firebreak, bargaining will achieve this outcome, and if the reverse, bargaining will achieve the reverse outcome, regardless of whether the farmer initially had the right to be free from sparks. So far, so good — it seems, on the surface, that if bargaining is costless an efficient outcome will be achieved.
The problem is that these are not the only prior allocations possible. The Coase Theorem is supposed to work under any other allocation of prior rights. But it doesn't. It fails for a large and crucially important class of prior allocations: namely any that allow one party to coerce another.
But I don't teach a first year “toolbox” course. Indeed, we don't have such a course. (We have “Elements” which — I'm told — is about how to read lines of cases, something which is important but different.)
I do, however, teach a Jurisprudence course of my own devising. I do “Of Coase and Cattle” there. Should I add something like this? It would be a distraction from where I'm trying to go, but maybe a useful one.
Then again, if I really let myself get distracted, I'd soon be trying to explain why the solution to the problem here is Habermassian, not libertarian. And that would take me very far from where the course is currently designed to go. But maybe I should bite the bullet and take it there? But that would make it much more of a philosophy course, and much less of an analytic jurisprudence course, than I intend it to be.