There are plenty of studies which demonstrate the impact of TV and video game violence to actual violence. There is a pretty clear causal link between "gangsta rap" and a whole class of inner city youths and suburban wanna-bes that engage in negative activities.
Therefore, if you give society's stamp of approval to this simulated activity, and popularize it in the media, more people will begin to see sexual abuse of children as acceptable. The likely consequence is an increase in such abuse.
On the other hand, if you do not allow this narrowly defined class of non-political, non-religous, purely pornographic "speech" you have only deprived a few perverts of an opportunity to indulge their baser instincts.
There is no harm to free speech, and no harm to society, by restricting virtual kiddy porn, and great potential damage if we allow it.
The ones I've seen have been questionable at best, often showing correlation but not causation. But even if there is a statistically significant impact, does that mean that violent TV shows and video games should be banned?
Therefore, if you give society's stamp of approval to this simulated activity
There is a huge difference between something being legal and "society" approving of it. Racist speech is legal, but not approved of. Computer-generated kiddie porn falls into the same category.
On the other hand, if you do not allow this narrowly defined class of non-political, non-religous, purely pornographic "speech"
Once again, read the law and the ruling. It was not "narrowly defined".
you have only deprived a few perverts of an opportunity to indulge their baser instincts
Or possibly, you have removed a legal outlet for their perversion, thus making them more likely to satisfy their desires by abusing real children.