In the episode we spent some time discussing Sacha Baron Cohen's humor of duping people (I don't know whether he does this in his current movie, which sounds like it has more scripted elements), which I generally think is great, while Dylan and Seth found it hard to sit through given the duping of the innocent.
So we have the innocent bystanders, but they are clearly not the butt of the joke; the Borat character is the clown, but clearly a lot of the humor comes out of the interaction of this character and "the real world," i.e. people who aren't in on the joke. (His Ali G film which didn't feature any of this wasn't nearly as funny.)
I don't think this is a simple matter of ridiculing the bystanders, and I'm reminded of the "kids react" series on YouTube, where yes, the people's reactions are in some sense the point, but it's the reaction to a specific absurdity that matters. With Cohen, it's certainly a test of the dignity and credulity of the bystander: a really astute person just wouldn't keep going along with this (so it's a mild form of the Milgram experiment). These people all know they're being filmed, and that their reactions will be observed, so if they betray how horrible they are (as did the guys who sued Cohen), that's their fault, right? On the other hand, this article by artist Linda Stein describes the process of deception, and what seems more important to Stein, the selective editing that according to her "makes the 'figures' in his art — his interviewees — look foolish, so that he looks superior." (My suspicion is more that they chose the funniest clips to include, period, not the ones putting forth some agenda.)
Putting aside the moral question, is it funny? I think so. Apart from the "fish out of water" individual jokes, to me this is effective exactly because embarrassment is a live issue, meaning that humor is our way of dealing with things that make us uncomfortable. Over-the-top violence can be funny in a movie, but our relation to that is clearly different: death is the great and horrible border to our whole existence, so of course that's going to be touchy, and we can use humor to deal with it. Embarrassment, is something we're only one pratfall away from, and (as Bergson would point out) is of course inherently mild, so it's of course different to laugh at someone in a candid camera situation who's been told he has cancer (but doesn't really!) than to laugh at someone who has to be embarrassed by talking to someone who's embarrassing himself. What is uncomfortable about this kind of humor to many (and sometimes I just have to shut it off and leave the room to cool down for a while too) is not the presence of the bystanders, but just how foolish the fool's situation is, so for instance, I recall having the same reaction to "I Love Lucy" reruns.
What makes a Borat routine effective or not, if you can tolerate that general kind of humor, is just the quality of the individual jokes, the timing, and yes, some people's reactions are funnier than others.