Optimizing the Auction
Are you assuming here that the sequencing auction for block N happens after the transactions in block N are known? I think what @karl had in mind was the sequencing auction happening well before block N, eg. potentially even a day before. This way the sequencers would be buying rights to the expectation of future MEV, not bidding on permutations (and insertions and delay-to-next-block operations) directly. Does this simplify the above analysis?
Impact on Inflation
The third option has a lot of internal choice! One option that I am particularly excited about is funding public goods through some DAO, on-chain quadratic funding gadget, or similar tool.
he simplest form of MEV that isn’t discussed is transaction elision — e.g. a validator not repeatedly adding a transaction to the transaction set.
I agree this is a form of MEV too! Though I wonder how much of that is captured by the ability to reorder transactions arbitrarily including inserting your own transactions before some of the transactions in the original block.