Think about it this way: The FAA told the airlines it was just dandy to disarm pilots and install cheesy cockpit doors in order to get another first class seat. Three airplanes were highjacked and flown to their destruction and the Bush administration "rewards" the idiot executives who made that stupid business decision with $12 billion in taxpayer dollars. If we want the environment to work that way, the results will be catastrophic. That's why I wrote a book showing how free enterprise system truly can address these intangible issues.
Interesting thoughts. However, I would disagree on an important point: the STATED purpose of the EPA -- i.e., the intention, from the point of view of government might be to deal with unfairly externalized costs imposed on the rest of us by industry (mainly in the way of air/water pollution, but including other things as well). But that isn't what it, in fact, does. What it actually does is to increase overall costs on everyone by hamstringing industry, adopting one-size-fits-all regulation (such as the issue on air pollution from eastern coal vs cleaner western coal, and the idiotic requirement that all plants, irrespective of the kind of coal they burn, install "scrubbers").
I haven't read your book yet, but I take a Coasian approach: the best way to internalize costs that are now externalized is to expand the institution of private property rights.