Surely you just fit seats that are higher above the floor, to benefit from the wider cross-section
I'd say that the ability (which one currently takes for granted) to put your feet on the floor when seated would come pretty high up the list of passenger comfort priorities. Putting seats on longer legs would also have implications for their crashworthiness. And of course there is still the problem of having to remove, or greatly reduce the height of, the overhead bins so that you don't bang your head every time you stand up.
and/or carve out an armrest in the sidewall panel to save another couple of inches?
That's probably a non-starter too. Even if there was a suitable void in the sidewall to allow this, your extra "couple of inches" wouldn't be nearly enough to accommodate 11-abreast seats unless they were ridiculously narrow.