Might be a suitable substituite for the lack of car damage. Then penalize the racer a couple seconds or whatever. Oh, as if smacking a wall doesn't slow you down enough ...
Flags would be good - they could give manual control in the pits so you could get pinged for speeding in pit lane, plus jump starts, and cop yellows and blacks for chicane cutting.
IT would just add a new element to the game, thats all, and the should give us an option to turn on or off the falgs so you can play it what ever way you want.
The only flags that would feasably be used would be blue or black, and perhaps chequered, so I don't think that all the work that'd have to be put into it would justify it
It would only work if the AI messed up on occation and was penalized for their errors as well. It's no fun racing against perfect drivers in better cars. The AI would have to be very realistic.