i am having the same issue.
pac file works fine with Safari back in Snow Leopard 10.6.8, now it does not work with Lion 10.7, however, firefox seems to be working with the same pac file in Lion 10.7
i checked the Console message, and find some error messages like:
deny file-read-data /path/to/pacfile
Because of the way Lion's sandboxing mechanism works, having a locally-stored .pac file will not work. Store your .pac on a local server and enter it's address as "http://www.server.com/mypacfile.pac" and it'll work. Credit goes to user FreeWizard, as they posted this solution in the following thread:
Thanks to the info about sandboxing, I've figured done a workaround by enabling web sharing and putting the proxy file on the local host (ie http://localhost/mpacfile.pac). This helps me because it doesn't make all my requests go to the remote sever before determining if it should go to the proxy or not.