Pat42:
Well the basic problem with what you outline here, is that people will try to drive that line towards lower-cost-lower-saftey until people start dying. Since we don't want that, and since people are so blissfully ignorant and tend to think "it won't happen to me" we need regulations to protect people from their own bad choices.
Are the regulations strict enought today? Too strict?
Safety doesn't just happen. Aviations outstanding safety record is not a matter of inherent safety, like people tend to think. It the people working with flying (engineers, pilots, cabin crew, dispatches, meteorologists, air traffic controllers etc etc), that make it safe.
As you said the line has to be drawn somewhere. But imho the public can not be trusted to choose where, on the basis of cheap flights. We need regulation.