That also is not good for anyone.

Of course not. But it might be the least bad outcome. If there will perpetually be minorities in both the Jewish and Palestinian camps that will never settle for peaceful coexistence, and the majorities in their camps can't stop them from generating conflict, then either one camp destroys the other or they fight forever. The latter is terrible, but still less terrible than either camp being destroyed.

Offer the Palestinian people a state of their own if they give the Israelis the heads of Hamas. Either location, or physically deliver the bodies.

How do you do that? The "Palestinian people" isn't a person that can enter into an agreement. It's a collective action problem. Unless people have effectively organized themselves into a government or similar organization with institutions that can reach a binding conclusion on issues, then they'll be just like any other group of millions of people - who all have different opinions and perspectives. Plus, it's the heads of Hamas that are in charge of Gaza, not the Palestinian people - and the Hamas folks are the ones with all the guns.

Plus, Bibi doesn't have the authority to make that deal. The Knesset would have to approve - and they never would. The two-state solution is intensely unpopular in Israel right now. It would be political suicide for any party - right-wing or center-right (since the left is all but dead) - to support that kind of move. No Israeli leader wants the slaughter of a thousand innocent Jews to be what birthed a new Palestinian nation.