When coin creation diminishes transaction fees are supposed to encourage people to keep generating blocks. But how does the transaction pricing work?

The cost of hashing does not increase from including another transaction in a block. A generator will always benefit from including a transaction no matter how small the fee. So the fees will approach zero (as, indeed, they are now) making block creation very unrewarding which will reduce the computing power providing Bitcoin its security to almost nothing.

The wiki only talks about how limited block sizes keeps transactions scarce and prices up. Is that it? I see no market mechanism connecting the demand for transactions to the block size limits. How will everyone agree on maximum block sizes?

Am I missing something?