However presuming some transactions pay less per byte than others (and higher valued transactions can afford to pay more per byte), the economic converse effect occurs wherein the miner has the incentive to make the smallest block possible or below the size where propagation latency is linearly proportional to block size (i.e. the latency that is a constant factor independent of data transferred), which is again not a free market limit on block size and not a fee market.
So if I understand you correctly, you assert that the fact that not everyone is willing to pay the same transaction fee rate in BTC/B, this is somehow demonstrative of a failure of free markets? Cause that's what it looks like you are claiming.
You seem to have successfully demonstrated the central argument that each miner is incentivized to include as many high-BTC/B transactions up to the point where transaction fee = marginal orphanage cost. So what is the problem? Why do you consider this as 'not free market'?
I see nothing in this that suggests BU is worse than core in this regard. Help me understand.