You bring up a few different issues, here are some responses:
1) Technically, Python isn't interpreted (usually) - it is compiled to bytecode and that bytecode is run on a virtual machine.
So Python doesn't provide executables because it runs bytecode, not machine code.
You could just as well ask why Java doesn't produce executables.
The standard advantages of virtual machines apply: A big one being a simplified cross-platform development experience.
You could distribute just the .pyc (compiled bytecode) files if you don't want your source to be available. See this reference.
2) Here, you are talking about dynamic vs. static languages. There are tradeoffs, of course. One disadvantage of dynamic languages, as you mention, is that you get more run-time errors rather than compile-time errors.
There are, of course, corresponding advantages. I'll point you to some resources discussing both sides:
3) Quite right. Just as you need the Java VM installed to run Java, perl to run Perl, etc.
Regarding your last point:
The whole idea of running in a VM is that you can install that VM once, then run many different apps. By bundlig the whole VM with every app (such as with py2exe), you are going against that concept. So yes, you have to pay the cost in terms of size.