In practical terms, that's what they are doing, isn't it, LtEve? Except that everyone gets offered the discounted fare, but has to pay a premium if they want more than the basic service of a seat somewhere on the plane.
If dh wants to fly home midweek, and has to pay for it himself, he'll book a flight but won't pay for allocated seating, priority boarding or baggage - all he wants is to be on the plane, and he doesn't need or want the extras - so he pays the lowest fare. When we travel together as a family, we will pay the extra to book seats together and have hold baggage.
However, I do think that airlines and travel companies should be crystal clear about this - the OP said that it wasn't until after she had paid for the holiday that she was told she'd have to pay extra to guarantee allocated seating - if this had been made clear to her at the point of booking, she'd have had the option either to adjust her budget to accomodate the extra cost, or to look for a holiday with a different operator who would allocate seating within her budget.
It is not fair if the airline/travel company obscures the fact that you have to pay extra for allocated seating until you have paid and have no choice but to pay the premium for allocated seating or risk being seated apart.
However, I also think that, if you choose not to pay extra for allocated seating, and know that this means you may not be seated with your children, you shouldn't then kick off and expect other people to accomodate you - especially if they have paid the premium for allocated seating - especially by blackmailing them with the threat of having to deal with their child's needs all flight.