Question: 5.2 Suppose in the example in Table 18.2 that the two parties cannot negotiate. The government imposes a tax on the auto body shop equal
5.2 Suppose in the example in Table 18.2 that the two parties cannot negotiate. The government imposes a tax on the auto body shop equal to the marginal harm it does to the tea house. What is that tax schedule? Does it result in the welfare-maximizing outcome? How does the outcome change if the tax is imposed and they can bargain? (Hint: If Alice is paying the tax, then she has the right to produce at whatever level she wants.)
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