By releasing an API, and letting third party developers pick up the slack, the community grows and the main company doesn't have to invest as much themselves into this annoying UI stuff. And even if their own efforts are misguided, there are other options, so people stick around. Once they've decided they got all they need from the third parties, and users are too attached to leave, they cut off access. It's a rug-pull from under the people that helped build the community up so I can see why it feels like a betrayal.
While they have technically not 'cut off' access, they chose their pricing for a reason, and it will have this effect. As to whether third party apps are superior, to me that's a side issue - if main-Reddit makes a user-hostile decision, their site and app won't support ameliorating that since it goes against their plans. Third Party apps can and do, which is beneficial to users.
I see the argument that this openness makes the service harder to monetize, but it's not as if Reddit (or Twitter) ever gave it any actual effort. For example they could mandate that API usage past some threshold requires the app using it to present ads delivered by the API, and if users want to get rid of them they could subscribe to Reddit Premium. I don't think there'd be much resistance to this from heavier Reddit users — most realize that the free ride wasn't going to last forever, but the prices being asked for now are outrageous and many times greater than what Reddit is losing to users not seeing ads.
How would you make a better app?
For the API I think only someone with access to Reddit data can answer that. They likely have internal reports about why they chose this price point - that would be the starting point for any conversation I think. One example - if app users are highly motivated and produce a lot of content and engagement for the remaining (ad-viewing) users to interact with, then free might be the sensible price. But I have no idea if this is the case. Being able to design a pricing scheme is not really a prerequisite for being unhappy with things changing anyway, feedback is important.