Who says the car has to be small? There were no SUVs when I was a kid; people drove small families around in sedans, and larger ones in station wagons - later, minivans. It worked fine, and this could all be done again.
Because they are killing pedestrians and cyclists at an increasing rate in North America, while the same collisions are coming down in other developed countries. If the industry doesn't regulate itself, the government needs to step in for the common good.