Pass In "WHERE" parameters to PostgreSQL View?

In most cases the set-returning function is the way to go, but in the event that you want to both read and write to the set, a view may be more appropriate. And it is possible for a view to read a session parameter:

CREATE VIEW widget_sb AS
  SELECT * FROM widget
  WHERE column = cast(current_setting('mydomain.myparam') as int)

SET mydomain.myparam = 0
select * from widget_sb
[results]

SET mydomain.myparam = 1
select * from widget_sb
[distinct results]

In addition to what @a_horse already cleared up, you could simplify your SQL by using JOIN syntax instead of nested subqueries. Performance will be similar, but the syntax is much shorter and easier to manage.

CREATE OR REPLACE FUNCTION param_labels(_region_label text, _model_label text)
  RETURNS TABLE (param_label text, param_graphics_label text) AS
$func$
    SELECT p.param_label, p.param_graphics_label
    FROM   parameters      p 
    JOIN   parameter_links l USING (param_id)
    JOIN   regions         r USING (region_id)
    JOIN   models          m USING (model_id)
    WHERE  p.active
    AND    r.region_label = $1 
    AND    m.model_label = $2
    ORDER  BY p.param_graphics_label;
$func$ LANGUAGE sql;

• If model_label is not unique or something else in the query produces duplicate rows, you may want to make that SELECT DISTINCT p.param_graphics_label, p.param_label - with a matching ORDER BY clause for best performance. Or use a GROUP BY clause.

• Since Postgres 9.2 you can use the declared parameter names in place of $1 and $2 in SQL functions. (Has been possible for PL/pgSQL functions for a long time).

• Care must be taken to avoid naming conflicts. That's why I make it a habit to prefix parameter names in the declaration (those are visible most everywhere inside the function) and table-qualify column names in the body.

• I simplified WHERE p.active = 'TRUE' to WHERE p.active, because the column active should most probably be of type boolean, not text.

• USING only works if the column names are unambiguous across all tables to the left of the JOIN. Else you have to use the more explicit syntax:
  ON l.param_id = p.param_id

You could use a set returning function:

create or replace function label_params(parm1 text, parm2 text)
  returns table (param_label text, param_graphics_label text)
as
$body$
  select ...
  WHERE region_label = $1 
     AND model_id = (SELECT model_id FROM models WHERE model_label = $2)
  ....
$body$
language sql;

Then you can do:

select *
from label_params('foo', 'bar')

Btw: are you sure you want:

AND model_id = (SELECT model_id FROM models WHERE model_label = $2)

if model_label is not unique (or the primary key) then this will throw an error eventually. You probably want:

AND model_id IN (SELECT model_id FROM models WHERE model_label = $2)