As I understand it is gravity's inverse square law that makes the effect strongest closet to the glacier and tapering off over a couple thousand kilometers.
My understanding as well. The image, though, doesn't convey sea level dipping for many kilometers around former glacier edge and rising only further away (possibly in another hemisphere entirely)—instead it shows sea level rising immediately at the edge, which doesn't seem to track.
I think the image is trying to convey that there's a rising immediately near the glacier due to the tectonic plate lifting up. Then there's a falling due to reduced gravitation. What's not shown would be (much further away) a rising due to increased water volume.
I agree that the image is a bit confusing.
I think the green line is the sea level after the melting, since it is labeled Final Sea Level. It does not show a fall, only a rise, next to the glacier.