WC,
You are right to a certain extent. The FAA should not dictate what the market should or shouldn't be. But the FAA will dictate what their system can handle. So what you might see is what SFO instituted about the size of aircraft going to certain airports.
The airlines will do NOTHING to ease the problem. They get bad press...who cares, it will be forgotten in about two months. With load factors in the 80% range, they certainly aren't losing any passengers due to miserable service.
But if the the airlines don't get their act together and show some constraint on traffic, what you will see is a tough passerger bill of rights from Congress. You think some sort of regulation from the FAA is bad.......Ask the British Airways captain why he flew (or tried to fly) a three working engine 747 from SFO to LHR (almost made it). Do you not think the EU passenger bill of rights might have had something to do with it? He admitted it did, I believe.
The airlines' choice, some sort of limitation/regulations regarding traffic or a passenger bill of rights.
As I said in the other post, the airlines have given exectations to passengers that they can fly coast to coast for $99 and get direct service from any community with a 5000ft rwy to any major city. Anything less and the passengers complain.