Earlier quoted context omitted.
I feel like I hadn't thought of this as a market failure until reading your post calling it that. You're absolutely right about it. That's exactly what it is and the need for government involvement is quite obvious now. Suppliers are going to need to be held liable for the negative externalities their product offerings create, otherwise we're stuck at an equilibrium point where this situation does not improve.
If ISPs were treated like a utility and charged per bit, customers would have an incentive to ensure that their devices weren't dumping traffic onto the internet. It's rare that you can see a dashboard showing your usage, even rarer to see a dashboard showing your usage, broken down by device.
DDOS attacks via IOT don't have to send much data per request. If my devices are doing an extra 10Mb/hour, I won't notice. 1000 homes is 10Gb/hour and that's just a few blocks in a city. 100,000 homes seems easy to hit, which is a petabyte of data per hour.
It's death by a thousand paper cuts. If my internet bill goes up a dollar per month, it's highly unlikely I'm going to debug my refrigerator to figure out how to stop it.