Question: In the example in Table 18.2, suppose that the two parties cannot negotiate. The government imposes a tax on the auto body shop equal to

In the example in Table 18.2, suppose 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 welfaremaximizing outcome? How does the outcome change if the tax is imposed and they can bargain?

Table 18.2

Profit, $ Tea House 400 200 Auto Body Shop's Output, Cars per Hour Auto Body Shop Total 400 500 300 400 400

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