Why did they blur faces of some people in Bad Grandpa?

Presumably because they didn't or couldn't get a release form.

In many jurisdictions a signed Release Form is required, to be able to broadcast the actions of a member of the general public, other than as a simple non-identifiable passer-by or part of a large crowd.

Getting this signed allows you to use the footage & prevents you from being sued later, if they decide they don't like it.

There is a good précis of the guidelines here, without going into all the full legal aspects of the issue - WebVideoZone: Stay out of trouble: Know when to use a Video Release Form

Extract:

When do you need to use a release form?
Laws covering the use of images of individuals frequently differ based on jurisdiction - from country to country and state to state. While there is no absolute rule of law you must follow, there is one absolute rule of thumb:

If you plan to use a person's image for commercial purposes, you need to get a signed video release form from that individual.

There are some exceptions to this rule. For example, if you shoot a crowd scene of people in a public area, you generally do not need a video release form from every person in the crowd. By being in a public area, we all give up our 'reasonable expectation of privacy.'

According to this site:

The true joke of the entire film, however, is that it is a joke, and we all know it, even if most of Knoxville and Nicoll’s co-stars are unwilling and unaware participants.

And it goes on saying that:

Most of the victims of the numerous pranks are apparently accepting enough, though there are only a few instances of blurred out faces, so who knows how many takes the production had to go through with certain bits if too many participants objected to being shown in the final product.

So it is possible that few people simply did not want their faces to be shown on screen.

It's also possible that people just left. For many of the gags, asking for release forms first would have tipped their hand.

They only people who are unblurred are people who could be found to sign a release and did so.

Generally blurring of faces is done when people are there who haven't given their permission to be identified, it's the same reason why Google blur out faces and reg plates on Google Maps.

Not everyone wants people to know where they are for numerous reasons - what if some of the people were banned by courts from entering the area where they were filming but they really wanted to see Jackass, by showing their faces they could land them in a lot of hot water for entering that area because they were banned from that area in the past for what ever reason.

Funny thing is there was a show in the UK in Warrington in the 80's called the Hit Man and Her that was filmed at Mr Smiths (sadly the place recently got burned down). But Pete Waterman recalls warning people in the club that it was live TV and if you don't want people to know where you are - for example the police, wife, etc don't go in there - and there was regular occurrences where people would be caught out because their face appeared on the camera!