by mexilplif
Did we forget about player C in Tokyo Bay. Tokyo Bay is the same as Tokyo. per the rules" Tokyo Bay grants the same advantages and disadvantages as Tokyo City"So the attack with the Paw is on both players players A and C.
Player A takes no damage
Player C takes damage(assuming no damage reduction from cards)
Now Fire Breathing since damage was dealt
Players to the left and right of Player B take one point
So now the real question is if player A is next to player B would they take damage. I see it as yes since fire Breathing is not an Attack but just collateral damage.(per the rules).
Sorry this changes my answer above as i now have rules in front of me.