[Jdanz]

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If (and that's a big if) government did actually allow organizational costs to be lower in this one narrow case, that alone would justify the oppression and bureaucratic bungling? Would you shoot the patient to kill his cancer?

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This is the main point i've been trying to get at. Frankly i don't think it's an if, it's a certainty insomuch as it would be easier for a government to enforce a system holding companies accountable for pollution, at the trade off of there being some amount of coercion and some amount of guess work in trying to determine exactly how valuable a resource is. It's certainly an imperfect system.

However, i do believe that this is a specifically good example of the main purpose of the state. I think that the state helps people to act in a rational collective manner while reducing the costs of acting collectively and that is its main benifit.

Government in it's simplest form is people giving up some amount of liberty to allow themselves to work together in an efficent manner. It's a necessary evil. This doesn't make the case for government it just is the justification for it.
I think it's reasonable to prefer either system, but i think it is unreasonable to unequivicably say one is flat out better/worse as both provide things the other simply CANNOT.

Though i'm for a more interventionist government, i think a very solid case can be made for an extremely limited government that still allows for the delineation and enforcement of property rights as it's only functions (which would solve the energy problem we're discussing by assigning and then enforcing the "public's" right to clean air).