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What? Your argument is that individuals are most likely not harmed enough to bother pursuing compensation, but that they need regulation to protect them from what isn't harming them?

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No, my argument is that nobody has been sufficiently harmed such that they individually have the incentive to pursue legal remedies. This is the classic dillema economists call the "collective action problem." For instance, suppose Citibank stole 1 cent per account each month. Would you sue? No, because your remedy is the recovery of 1 cent. Thus "collective action" is required rather than individual action. This is why problems like this are solved either by the "class action lawsuit" or through governmental regulation and enforcement.

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regulations set "acceptable levels" of pollution which are, obviously, non-zero.

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Obviously. Pollution is acceptable. This is widely agreed upon in the regulatory world (EPA, OSHA, whatever). As it should be. For instance, suppose the manufacture of steel caused as a bioproduct, the production of dioxin, a major carcinogen. Should steel making be outlawed? No. Instead, what happens is that government regulations proscribe an acceptable level of pollution (although some pollutants can be deemed so toxic that a zero-level is the only acceptable level). Basically, sound regulation is all about cost-benefit analysis, not absolute prohibitions on pollutants, etc.

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Lawyers are economic friction but regulatory bureaucracies are not?

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Both create deadweight economic losses. The question is which creates a smaller loss. Bureaucracy, while definitely undesirable, is much more efficient than private litigation (which by the way, requires that the government pay for a separate bureaucracy known as the court system). If you recommended massive private litigation, then you would necessarily create a massive judicial bureaucracy.

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How is not polluting for fear of being sanctioned by a regulatory agency better than not polluting for fear of being privately sued?

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There is a concept in tort law, particularly among the law and econ thinkers, about asking "who is the lowest cost avoider"? Basically, the law should be set up so that the least cost avoider takes action to avoid the injury.

Suppose, for example, that I own a house on a hill. You have a 1M house downhill from mine. If a landslide occurs, your house will be destroyed. I can build a retaining wall for $5000 downhill from my house but uphill from your house. If I build the wall, there is an 80% chance that a landslide will be avoided.

In situations like this, the law wants a retaining wall built because it is the lowest cost solution. The problem, however, is that I get minimal benefit from building this wall. So a few outcomes could happen. (1) Regulation gets passed that says "uphill owners must build retaining walls"; or (2) everybody gets taxed, and government comes in and builds a retaining wall itself; or (3) no retaining wall gets built, but the downhill landowner can sue me for negligent conditions of the land resulting in injury. (Actually, this last remedy is a bit unclear--the law distinguishes between "natural conditions occuring on land" and "artificial conditions and activities on land")

But my basic point is, when trying to figure out how an injury should be avoided, you need to look at the lowest cost avoidance. Voluntary compliance by individuals (due to the threat of civil or criminal liability from regulation), can be a very cheap solution (provided the regulation does not grow too unweildy). Private enforcement of rights is very very expensive.

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Furthermore, a regulatory bureaucracy has a financial incentive to not solve the problem. If the problem were solved the regulatory agency could not generate revenue nor justify its existence.

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This is actually erroneous. Bureaucracy does not have an incentive to not do its job--its the opposite. The incentive bureaucracy has is to do its job, and then some. This is why bureaucracy grows. When laws get passed, bureaucracy steps in an starts the supervision/enforcement cycle, thus justifying its existence. One of the biggest complaints about the "administrative state" is that bureaucracies, through the rulemaking process, can essentially make an end run around the democratic legislative process, and start creating more and more quasi-laws that cost an ever increasing amount to comply with. For example, the consumer product safety commission prescribed the distance that slats on a baby crib can be spaced. Why? Because once upon a time, some kid got his head stuck between slats spaced too widely apart, and he got killed. So now government has created (independent of the democratic legislative process), a rule that costs all purchasers of baby cribs more money. THIS is why people hate bureaucracy--not because they go around trying to NOT do their job.

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Not to mention the inevitable corruption that arises from government regulation of private industries as competitors lobby to have the regulations written and interpreted in their favor and against the interests of their competition.

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The private lobbying function is merely an extention of the democratic process. It is the way in which legislatures (and rulemakers) are influenced. I much prefer this approach than a tyrranical government that cannot be influenced by its constituency.

Do corporations have a disproportionate say? Undoubtedly. But we work in a market economy, and the corporatios have more money than the Earth Justice! crowd, so that's just life. If you dont like it, try to get Ralph Nader elected president.

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A "low emission vehicle" still has emissions.

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Yes, chemistry is a bitch, isn't it. This is called combustion. There are byproducts. One byproduct is heat. Another byproduct is water. Another is CO2. Another are volatile organic compounds that turn into smog after they get hit by sunlight. What's your point? We should all walk? But walking creates byproducts. CO2 from increased respiration. Energy consumption in the form of food, which is turned into sewage, which is a pollutant? I dont understand your point.

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A road owner could not provide a road without admitting liability for pollution usless the vehicles were actually zero-emission.

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Im not sure you have a good idea of what zero-emissions is. No such car exists. When you have an electric car, you use batteries. Batteries get charged off the power grid. The majority of the power in this country is generated from coal and natural gas plants, which in turn create emissions. Just because you cant see tailpipe emissions, doesnt mean these cars are zero emissions. This is called the "mobile source" vs. "stationary source" problem.

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So if you're going to descend into the arcana of tort law, I guess you win.

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As you can see from my detailed response, I am not relying entirely on tort law to debunk your proposal. You just have a bad understanding of economic incentives generally. And also, you seem to have a poor grasp of air quality issues specifically. (In an earlier life, I analyzed air quality and transportation issues for a living.)