Thinking back to my Property Law classes there were a string of cases that seriously limited common law private rights of action for Nuisance and other similar torts which can be used as a method of private environmental regulation. This shift occurred in the mid to late 19th Century in an attempt to help foster the industrial revolution. I will open my seriously dusty law school text book later to see if I can find any actual citations.
Thus, I believe that the Krugman argument and others like it can be defeated by showing that it was a failure of the Court’s to enforce the common law private rights of action that allowed corporations to pollute at ease. So long as the particular industry did not tick off the legislature they had a near free pass to pollute. No free pass when your neighbor can sue for any damages caused.
With regard to property rights in water (again going off memory here), the old English rule was a straight first in time, first in right property ownership. Whoever first acquired the waterway owned it to the exclusion of others.
This English rule was used in certain western US territories because of the scarcity of water sources and lack of population density.
The more Eastern US states adopted a system of Riparian rights which essentially provided that a party who owns land that abuts a waterway has the right of reasonable use. You may use the water in any way that does not interfere with the reasonable use by others. But as mentioned above, the Court’s became pro-industry during the industrial revolution.