I think a part of the problem is that the instructor is usually an hour builder and he desperately wants the PIC time in his logbook.
If he could not it as PIC, he may as well be stuffing shelves at Tescos; he'd make more money.
Under G-reg regs, that alone prevents the other pilot legally logging it as PIC. He can log it as PIC (legally at that point) but the instructor then breaks the law himself when he enters it in his logbook as PIC. The student has not broken any law IMHO; it is the instructor who has. But in reality nobody is ever likely to find out.
The FAA addresses this intractable situation by making it legal.