You're correct that the Israeli right wing would really like the entire land to be ruled by the Jewish people. Their "success" since 1967 has really been driven by the Arab countries and the Palestinians. The political violence and the wars they waged pushed the Israeli public to become more extreme and unable to imagine a future where it's possible for everyone to live in peace on the same land. I think this is pretty much fact. Rabin who was trying to make peace was assassinated as a direct result of the heated atmosphere in the wake of Hamas' suicide bombing campaign against Israel, which had the goal of sabotaging the peace process.
I don't think it's correct that most Palestinians want what you say they want (surveys?). And even if it's true, the majority of Palestinians has no means of getting what they want. In areas under their control it's certainly hasn't been "pluralistic with equal rights and representation", it's been more like "I have a gun do what I say or else".
I think the two state solution is impossible but not for the reasons you mention. I don't think we need Gaza's courts or universities. It's also not the dependency on electricity etc. It's impossible for other reasons. On the Israeli side nobody is willing to live with an aggressive entity that wants to destroy it having their own state 5 minute driving distance from all their major cities. Gaza (the withdrawal of Israel and the rise of Hamas and their militarization) to them is proof there's no way that can work. There is no trust that the Palestinians will respect any agreement. On the Palestinian side there's no body that actually represents the Palestinians and there are armed factions that have already said they'll reject any agreement and keep on fighting.
Israel has dismantled settlements in Sinai and in Gaza. I don't think the settlements are the problem. If there was a viable option for real peace Israel would dismantle the settlements (+/- maybe some land exchange around major blocks). Ofcourse the settlements don't help because their existence creates friction and hate and they're sort of illegal.
Maybe external parties will somehow enforce a two state solution. It's kind of hard to see now. Maybe we need enough time to pass so we get social processes that take us somewhere better. Also kind of hard to see right now. Maybe Israel will expel all Arabs from the region eventually (or enough of them that they can annex the occupied territories). Also hard to see. Maybe the Palestinians will unite and reject violence as means of making political progress and that will convince Israelis to let them in as equal citizens. Also hard to see. I.e. no solution. Partly has to do with broader geo-political processes, namely China and Russia's conflict with the west. If that's resolved (also hard to see) maybe progress can be made in the middle east as well.