1) At the present time, there is one jail in East Hydlaa and you could probably find it easily by duelling in Plaza (/me winks). If you take into account the fact that there are only 3 active cities at present, you will see why having a jail in every city is not a high priority at the moment. As more cities and levels show up, I imagine that will change. Also, since all races exist in all cities on all levels, I don't imagine there will be jails devoted to a single race.
2) There are no plans for a magic-free zone in the near (or semi-near) future. IC-wise, guards are in excellent physical shape, well-armored, well-trained in defensive magic, and confiscate anything that might be considered a weapon as soon as an arrest is made (and that includes glyphs).
3) As far as mechanics goes - we're working on that. For now, it's not a stretch to consider that items confiscated upon arrest will include those that can be used to harm oneself.
4) Permanent item/money confiscation only happens with OOC violations such as botting or glitching and those would not be not auctioned. IC confiscation can happen for IC violations or for the purposes of RP and typically doesn't involve a real removal of player items. It might be nice to have an auction event involving "confiscated items", but those items would be generated specifically for the event or donated by players interested in supporting the event.
5) DW glyphs aren't inherently prohibited items. For True Death poisons & such, see above comments about IC "confiscation". BlackFlame items are pretty darn evil, but it's highly unlikely that a regular guard would recognise a BF item, and if he/she did, that most likely means that he/she is a BF follower and would either a) free you to serve BF further or b) kill you to protect BF.
6) Not that I'm aware of. Anyway, something like that would need to wait a while until mechanics can be put in place to support it.
7) Team discussions on this sort of thing are currently occurring.
8 ) Players having official jail roles is an issue fraught with pitfalls and complications. The amount of time the team would have to spend in training, oversight, review, etc. could greatly diminish their ability to complete their current duties. I'm not saying it's impossible, just that it would be difficult.