In some sense, this leads to a better allocation of seats, as it allows those who desire some seats to pay for them, whilst those who have to preference get a cheaper flight. Now, people who used to be fine with the dice-roll of not paying get a worse experience. But this comes with the upside of those who really wanting the seats having a better chance.
This isn't an upgrade or anything, people who wanted to pay to reserve seats could already do so. You could have also not paid, and picked whatever was available, switch with your neighbors, and so on. Obviously, since Ryan Air figured out that they can extract some extra bucks out of that, you're now assigned a place and can no longer just pick whatever is available once you board. This is a standard rent-seeking behavior with no advantage for the customers.
Ryanair are fairly clear about what you must pay for when booking, and there are plenty of routes where they have competition from EasyJet, Norwegian etc.
It does if they use the extra income to reduce the ticket price. Which would sound pie-in-the-sky for most other companies, but considering Ryanair's prices, it wouldn't surprise me.