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Yes, the issue is that it refers to the same stereo system, which cannot be in two places at once. Your sentences solve the problem.

A modifier should be as close as possible to what it's modifying.
In C, more efficient in a European city implies that in a European city is an adverb modifying efficient and that its purpose is to describe in what context the rail system will be more efficient.
The intended meaning of the sentence is to describe the location of the rail system. Thus, in a European city should be placed next to rail system: a rail system in a European city.

Another issue:
The sentence needs to tell us the location of there directly after the introductory clause: Because the population there is denser, a commuter rail system in a European city...

As I noted above, a modifier should be as close as possible to what it's modifying.
In E, implemented with a comparable population implies that with a comparable population is an adverb describing how the system will be implemented.
A population in an American city implies that in an American city is an adjective describing the location of the population.
Thus, the comparison in E -- implemented in...implemented with -- is not parallel.

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