Why was it cancelled?

I think The Thin Blue Line was one of the funniest sitcom's ever, but it was probably the right decision to stop at two series, It is very unlikely that the standard would have been maintained

Yeah, that's true - but that is also one reason why British comedy is so good - just because they don't do it like the Americans and squeeze every drop out of it until it begins to just suck as it is the case with many American seriesthat last way too long. It's no coincidence that there are many great British sitcom classics that only lasted two seasons but still (or even because of that) are among the best and funniest things ever done - e.g. Fawlty Towers, The Office, Extras, Spaced.

It's quite often the case that a British series will only be made if the writers feel that they have something to say. Rather than a team of writers concerned with a series, many will only have one or two who are the only writers involved, So production is up to the whims/interest/available time of the writers.

"Yes, Minister/Prime Minister" is a perfect example. It was arguably the best British comedy series ever made. When the writers felt that they had run out of ideas, they stopped making it, and only started again when the writers felt that they had something fresh to say.

Likewise, John Cleese refused to make any more Fawlty Towers. He had 12 (or how ever many episodes there were) ideas that he wanted to use before he started, and when he was finished, that was it.

Ben Elton seems to be the only writer involved with this. He has an extremely varied career including lots of writing,both screenplays and fiction and non-fiction, stand up comedy and even the odd acting role. I can imagine it didn't continue because both he and Rolwan Atkinson wanted to move on to other things.