Well keep in mind we arent blocing the instance at all, we are silencing. that means if you wish to follow someone you can and will see their posts once you do. but unless you follow someone you wont know the instance exists.
The reason we cant simply moderate their individual users is because they arent on our server. Moderating our own userbase is a full time job, moderating the millions of people across the whole fediverse individually is impossible. Especially if you have mods that let anything go and wont act themselves.
Consider a similar scenario, a intentional bad-actor instance. No moderation of any kind. So someone who is really upset at you decides to write a bot (or do it manually) and start creating a new account every 15 minutes to send you harassment and spam. Sure you can block them but every 15 minutes they just get a new account and start over, no moderation so nothing you can do. you would be forced to be exposed to that. Thats why we step in. Basically if a person chooses to disengage from a conversation, they have a right to (As you just pointed out). the only time we will react at an instance level is when that right is violated as it has been here.