People who live paycheck-to-paycheck wouldn't be able to afford this. If it becomes very popular, those without disposable income may be unfairly abused by the system. Till now, finding a spot has been random lottery. Pay-for-privilege will leave struggling families out in the cold (perhaps literally).
Yet to punish a company so harshly before the phenomenon has proven to be a problem in practice seems draconian. The gap between theory and reality is large. Something that's harmful in theory can sometimes prove itself advantageous in unexpected ways.
And what if the company wasn't based in California? Would there be any recourse for California to exert regulatory pressure over a company based in another state? Pg's quote "if you outlaw the future, it will just happen elsewhere" seems relevant. Maybe it's a matter of time until this app catches on in other large cities. Nobody likes spending ~30 minutes searching for a parking spot.
But it's difficult to shake the feeling that the whole concept is, well, douchey. I dislike that word, but it seems quite applicable here. Sitting in a parking space for longer than you need it in order to personally profit is pretty much the definition of a dick move. Yet should that argument alone be sufficient reason to outlaw the entire market? I don't know.