I am an enormous Seinfeld fan. There are too many great ones to only have one favorite. I believe that my favorite ones were the ones with great monologues. The "Marine Biologist" may have the greatest monologue in TV comedy history. Another what Kramers and Newman's "Magic loogie" monologue. Classic.
I think that the most IMPORTANT episode was the final episode of season one. The show was just getting started and they were still developing the characters and roles of the main characters. It was the only episode in which Jerry and Elaine get back together in a relationship and they determine that they just can't be friends. It will either be all or nothing. (VERY IMPORTANT COMMENTARY ON PLUTONIC RELATIONSHIPS)
The reason why Seinfeld aired this episode is because the network directors felt that Jerry and Elaine getting together was what America wanted to see and they wanted to give the show a chance to make it past its first season...and pressured Larry David into going that direction. The problem is that shows with relationships are NOT SUSTAINABLE. If Jerry and Elaine would have continued to be in a relationship going into the second season...the show would have likely failed. Larry David had balls and decided to completely disregard the final episode of season one and they went on with the show as if that episode never happened.