Why wouldn't people pay for something highly useful? It seems the opposite, that people would pay for things that are highly useful. People don't pay for things that are marginally useful.

I sympathize with your sentiment but if you dig a little deeper you are asking Google and its shareholders to suffer a loss because you find something useful but do not want to pay of it. At its core this is a selfish argument. I am sure many users would be willing to pay Google a small amount to keep Google Reader alive but the problem is Google being a super large corp can not run the product with that much money. The same users can actually pay half that money to a company in India to build an equivalent product and get much superior and customer focused product than Google could build.