Like ArticMine pointed out, there is already a cost to produce a large spam block, regardless of whether the costs is paid by a user in the form of fees, or by a miner in the form of increased orphan risk.

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Smooth is also correct, however, that just because the spam block has a finite cost and that a fee market exists, it doesn't necessarily mean that the fees will be the "right" fees to keep people who want to run Bitcoin nodes on low-cost hardware with slow internet connections happy, for example.  As the chart above shows, both transaction fees and spam costs (measured in bitcoins) decrease as the propagation impedance of the network improves.  

This relates to the question of externalities.

(a) Does retaining the block size limit as an anti-spam measure (i.e., a production quota above the free market production Q*) result in a negative externality?  If so, is it worth it to implement a production quota below Q* and suffer a loss of economic activity equal to the region shaded in brown?

(b) If the answer to both questions in (a) is "yes," then the question is whether it is even possible to enforce a production quota without a strong organization or government willing to use force if necessary.  

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Your paper is fundamentally flawed because it addresses nothing resembling the current dynamics at stake in Bitcoin. More precisely it ignores the incentives for miners to centralize (as they have shown to have) to mitigate propagation times. In effect your paper clearly demonstrates it is more profitable to do so under free-floating blocks and you essentially rely on their altruism to maintain the validity of your model to make decisions going forward. In short, your work might be sound from a technical standpoint but can not be used to construct security models that depend on worst-behaviours assumptions.

I cannot accept that you could comment on Greg's game theory intelligence when you continue to wave away the clear negative externality present in your models. You chose to ignore the obvious tragedy of commons at stake and that is why your opinion can never be considered as long as you don't recognize the cost externalized to node and the overall centralization pressure suggested by YOUR alignment of the incentives.