Similarly, in chemicals regulation, an unregulated industry works towards the cheapest, most effective solution for their problem, but ignores the externalities. If the pesticide increases your yield, why would you care if it lowers the insect life which pollenates the crops for the neighbouring farms? The neighbouring farms aren't paying your bills. If your furniture treatment is cheaper than the alternative, who cares if it causes marginal damage to the health of the people using it over 20 years? In any case, it will be very difficult for anyone to tie any damage back to your product, so the reputation risk is limited. Again, the regulation is required to set a standard of progress - you don't just want innovation in cost and efficacy for the manufacturer, you want innovation relative to an objective standard which takes into account other impacts.
I do agree, though, that reducing cost for testing is also very important, to reduce the barrier to entry. Making testing too expensive also does damage. The EU actually had a clinical trials directive which proved to be too onerous, made the trials too expensive, and some measures had to be repealed. So it is a balancing act, but to me it's clear that both sides are important.
Sure but we don't know how bad the negative externalities of accumulation of human-made chemicals in our natural environment are until we get there.
We could be outcompeting in the short term with very large negative societal effects in the long term.
There's a feedback loop in the cost of innovation. Better medicines, fertilisers, preservatives, insulators, et cetera have increased both the health of the populace and wealth of their creators. Ceteris paribus, in a world with more innovative potential than downside, the less cautious society will outcompete the more cautious one.