(I thought of making a separate article with the rest, but I am enjoying this dialog too much, and don't really have the time to do it justice.)
The forces at war here are the health of the people. If prices are too high, they cannot live a healthy and happy life because of cost. Too low, and they cannot due to the waste that is produced by their consumption (it matters not that you can buy the best camping gear in the world if you have no place to use it). In poor societies, as we see, the government is trying to promote basic standards of living that include daily meals, shelter, and clothing. Because the populace has nothing, the cost has to be very low, and therefore, the cost to produce is kept low.
As societies become more affluent, and the cost of the necessities of life are no longer an issue, then the society has leisure time. And they want that leisure time to be quality as well. Thus they want to impose costs on manufacturers in order to reduce the cost of pollution to enjoy that leisure time. And the cost of goods must increase to support that.
But when the government stops thinking of the "quality of life" and starts on a jihad of purity, then things get out of balance. Removing 99% of mercury from the water supply is good and can be done with only marginal costs. removing 100% is unfeasible and cost prohibitive, as even nature will sabotage that effort. And provides no real incremental good over the 99% figure. When one side gains the power to DICTATE that is where the system breaks down.
Note the word dictate. That is what a monopoly will do in a pure capitalist society, or a government due in a pure dictatorship. The government, by design, should not allow a dictatorship. But with all things human, flaws are the rule, not the exception. So while the government of China is trying to lift its people out of the depths of subsistence, and thus are not shepherding their resources wisely, the government of first world countries are doing the opposite. Not utilizing their resources due to a mistaken belief that 100% must be the goal, not 99%. It is a flaw in human nature, not the pure design model (which cannot exist as you note because the system is based on human laws, not physical ones).
Eventually the pendulum will swing back. Through shortages, or war (hopefully not the latter). Manufacturing fled the country not because of greed, but because of over regulation that pushed the cost too high (or high enough depending upon your view). Should the need arise - and in time it will - then the regulations will be reduced to allow for exploitation of the existing resources and manufacturing will return.
While economics is based upon human rather than physical laws, one physical law seems to have precedence over the system. And that is Newton's third law. A body in motion tends to stay in motion. Thus while the pendulum between a clean environment and a prosperous life style swings between the 2 extremes, it will never stop in the "edenic" position. It will swing too far to one side, and then too far to the other. Overcompensation.
The real problem occurs when one side gains control over both sides of the equation. Production and regulation. Right now, the "greenies" control the government of most first world economies. So the production side cannot fall under their control, or their wish to push us back to third world status will become a reality. Conversely, during ramp up to get to first world status, often, the producers have complete control, and that is why the worst pollution is in third world countries (there is no time for leisure, so there is no time for greenies to worry about pollution - most of life is taken up with just creating a living environment).
A long way to make a point, I know (and should be longer, but time is running out). That is why I don't get into the scare tactics of Greenpeace, ELF or ALF, Al gore, or the other leaders of the GW religion. Given a pure capitalistic society, where we are all borg and therefore do not care about the quality of life once we have reached the necessities of life, I would agree and join them.
We are not there, and indeed, we do not need fanatics. We do need rational and sane husbanding of our resources. Which the producers have been pushed to that point. So now is not the time to give more power to the fanatics of one side. But to seek that ever illusive eden point. All of which is to say that I do not trust pure capitalism to get us there, but we are not in that danger now. Abuses occur, and companies are dinged for it. And the smart ones do not break the laws. But more laws is not what is needed. Sane laws are. SO that is why I am not going to grab a pitchfork and join a green crusade. I fight them not because I think we should have a polluted planet, but because we cannot have a 100% pure planet as they want. Man is a part of nature, not a cancer on it.