While I agree with most of what you say, and it captures important aspects of reality, I think it's still a dramatic oversimplification of reality, to the point of naïveté, in two ways that are in some sense contradictory opposites.

First, it treats people as individuals unaffected by social forces, whose power is treated as unrelated to how they choose to use it. In reality, the dynamics of power in a social organization is an arbitrarily complicated topic, and deeply constrains how people who have power can use it; and people's opinions mostly arise from the conventional wisdom of their social groups, which is subject not only to the limits of bounded rationality, but also to memetic selection pressure.

Second, the legislative and regulatory process is far from the disinterested consideration of the common good you ascribe to it; it's a conflict-filled social process involving constant negotiation among regulators, legislators, and their constituents. It is a mistake to try to understand it as if it were a sentient entity attempting to achieve certain goals by choosing means that its beliefs predict will promote those goals. To a significant extent, the individual people acting inside of it are such entities; but their goals and beliefs are at odds with one another, and as a result, the overall system does not behave in such a fashion. Sometimes it may happen to do so, which is often because the relevant part of the system is dominated by one or another powerful elite that is sufficiently unified to behave that way — although often the interests it promotes are not the common good, but a narrower set of interests. More often, due to collective action problems, it thrashes around in ways that appear irrational and random if you attempt to understand them using the metaphor of a sentient entity.

Your puzzlement about how we could have ended up with such perverse regulations as those that gave rise to low-flow toilets is a good example, but in fact public choice theory abounds with examples.

I say these are contradictory opposites because the first amounts to treating human beings as isolated contemplators, sort of floating in a void, while the second amounts to treating them as mere cells in a superorganism, devoid of individual beliefs or interests, their individuality entirely subjugated to the goals of the collective — a sort of Hegelian apotheosis through what seems to me to be the ultimate degradation. (Perhaps with the occasional exception of that guy.)

I think that with a somewhat more nuanced theory of human collective action, we can understand what does and doesn't work about existing forms of social organization, and then collaborate to improve them, providing us with alternatives that allow everyone to flourish in ways out of the reach of hunter-gatherers building seismically-unsafe huts, out of reach of proletarians toiling in misery in Foxconn factories, and even out of the reach of Captains of Industry hoping fondly to turn our nation into a new Somalia or Honduras.