Dufferin is very local. People heading downtown would probably prefer streetcar spacing (easier walking) and transfer to the next major intersection than to take it straight down to Bloor. Of course if you're going from Wilson Station to Dufferin Station and southwards, it's about that same via bus or subway (transferring at St George). Dufferin is rather hilly between Lawrence and St Clair. LRT spacing would drive away some of the local demand, especially in winter. Traffic wise, it would be a disaster.
I actually don't know what LRT can do on Dufferin. Stuff it underground? Might as well build the Jane LRT instead. Dufferin is better off with bus lanes and a mix of local and express buses. There are way too many traffic lights on St Clair and Dufferin.