Why can't I change paragraph space?

URL please.

Yes, URL and also a clearer description of what you want in the end, please. (For instance, you don’t say whether you want more or less space displayed after each paragraph.)

Either way, I suspect that you have tripped over the notorious CSS browser box model and the infamous collapsing margins. If that is the case, be ready for your eyes to cross and to get a headache. Here’s a decent article explaining collapsing margins I got when I googled for ‘Eric Meyer bottom margin’

That is in content.css BUT you need to create a child theme if you are going to change css that comes with core files. Otherwise it will be written over at the next upgrade.

It is not in your theme. It is at
wp-includes/js/tinymce/themes/advanced/skins/wp_theme/content.css

Use firebug for Foxfire or developer tools for IE and you can identity what css is contolling what you want to change.