Tyler comes up really, really big here.
I particularly like point #3, both parts A and B. To paraphrase:
A. Offshore drilling WAS regulated. Why isn't the failure an indictment of regulation?
B. The standard public choice critique is certainly not that markets are perfect. It is that government agencies are subject to problems of information acquisition, capture by industry, and desire for increased revenue. I have almost never heard a libertarian say that markets perform perfectly. The core of the free market position is that government agencies can be counted on to perform less well than P-Krug imagines.
In short, you can't criticize the model of perfect competition unless you are also willing to abandon the model of perfect government.
As usual, and as has been argued here before, LvM said it best:
Scarcely anyone interests himself in social problems without being led to do so by the desire to see reforms enacted. In almost all cases, before anyone begins to study the science, he has already decided on definite reforms that he wants to put through. Only a few have the strength to accept the knowledge that these reforms are impracticable and to draw all the inferences from it. Most men endure the sacrifice of the intellect more easily than the sacrifice of their daydreams. They cannot bear that their utopias should run aground on the unalterable necessities of human existence. What they yearn for is another reality different from the one given in this world...They wish to be free of a universe of whose order they do not approve.
(Ludwig von Mises, Epistemological Problems of Economics)
P-Krug is a smart guy. But he has been whoring his intellect in service of his daydreams for a decade now.
UPDATE: I have to add this, from a comment by David--
Krugman's first foray into this was to argue that the oil spill was proof that liability didn't work. In other words, we have a disaster in a heavily-regulated industry with liability caps, and we conclude from that that liability doesn't work.
UPDATE: Related post.... Nicely done, sir. Thanks for the tip in comments.