I live in Canada, but looking quickly only did make it look like those prices were high. In terms of labor I used to work with a buddy at our own company designing custom auto parts. Since we were just starting out and he was a mechanic we did a bit of mechanic work to pay the bills, and again from that point of view the cost seemed high.
As to the second question, I wouldn't bring it to the dealer since I know a fair number of mechanics who I know won't screw me on it, but that's just me being fortunate in this regard. I always found dealers to be more expensive than a regular shop so I tended to avoid them (unless it was warranty claim obviously) even before I knew people in the independent shops.
Since the place is already taking the engine apart for you to do the diagnosis, an alternate estimate now may be a bit too late. I would suggest getting them to show you an invoice on the breakdown of costs to see why its so expensive though. Maybe there's some aspect of taking the engine out/replacing the head gasket that is more difficult on your make of car or something.
As it turns out, the engine diagnosis showed that the engine had sustained damage but it was NOT unsalvageable. So the total cost to dissassemble the engine, repair it, replace the gasket and the water pump, then put the whole thing back together, is $4100. I think that's much more reasonable. If it seems high I think it was because I did not understand that the additional cost to disassemble the engine was factored in.
"Opportunities to do good are everywhere but the darkness is where the light needs to be".
-- Eliezer Yudkowski, author of "Harry Potter and the Methods of Rationality"