Your last paragraph is weird, your article is about externalities, but your last paragraph is discussing utility theory.

You say "If the residents downstream from the plant hold land on the river, the factory will have to negotiate with them in order to lawfully dump garbage via their property." Sure, real nice, if that is the way the world worked, but it is not. If the polluter negotiated a solution with those downstream, it would not be an externality. The externality occurs because the polluter simply pollutes at will.

Negative externalities are never benign. Nobody throws a gold brick through a window, it is always a brick that the thrower doesn't want and makes someone else deal with it.

We should follow a simple principle - the total costs of production of a good or service should be borne by the producer, the consumer, or a combination of both. If the true costs of production were covered by those that benefit, the world would be a much different place. And the greater the degree of uncovered negative externality, the greater should be the level of government involvement.