On 1, I agree that there are some Israelis that view them collectively as evil, and would harm them instrumentally without much thought. Hard to put numbers, but I guess that those are ~15% of the Jewish population. I don’t think that there is more that 1% that support direct violence against non-terrorists for its own sake (as opposed to “we really want to kill your arch-terrorist neighbor, and you happen to be there too, and we really can’t wait until you aren’t home”) even in a state of war. I don’t say my opinion about it, just that it is very different from the apparent Palestinian attitude.
On 2 I agree. It seem to be a general argument for judging people relative to their society, but this question is hard in the general case. As an anecdote, taking over the and contra-brain-washing the next generation was very successful in post-war west Germany. It is hard though, and probably work only under very specific conditions.
Maybe it is more helpful to speak in terms of subgoals: Israel try to achieve security. For that, it try to keep Hammas both quiet and weak. The externality of most ways that we keep them quiet is better life for Palestinians, and the opposite is true for making Hammas weak, with larger effect size.
(I believe most Israelis also care somewhat about Palestinians having better conditions as a terminal value—though probably not enough to effect policy, except for avoiding unnecessary harm. I don’t know from the inside about Palestinians attitude toward Israelis, but public information suggest that many of them wish us harm as a terminal value, even when in expense of other goals)