Teaching the Coase Theorem: Are We Getting It Right‪?‬

Introduction A small but growing number of economists, including Ronald Coase himself, argue that Coase's approach to externality problems is misrepresented by standard formulations of the Coase theorem [Coase, 1988; 1994; Friedman, 1991; McCloskey, 1998; Medema, 1994; 1995; Medema and Samuels, 1997; Posner, 1993; Klaes, 2000]. Despite the fact that Coase's ideas are discussed in virtually every undergraduate microeconomics textbook, Coase et al. believe, "to a considerable extent, what is taught in the textbooks is the (externality) theory as it existed before Coase" [Friedman, 1991]. The aim of this paper is to investigate this claim: to identify the distinctive features of Coase's externality analysis; to survey current introductory and intermediate microeconomics texts to determine whether and to what degree they get it wrong, and, in conclusion, to consider the implications of these findings for economic education.