Pay for a domain name or web development with PayPal and the person flat out scams you and PayPal will do nothing about it. Nor punish the person who stole your money. They'll just quote you the section of their terms that says virtual goods are not covered and close your case.
Unfortunately they are a necessary evil until somebody disrupts them.
What should they be doing about it? How do they determine whether you were scammed, or you're now scamming the domain/development seller to get whatever you bought for free? As any merchant doing any volume will tell you, the latter is the more common case! A scamming seller will get enough disputes that they'll lose the account fairly quickly, but there's a couple billion buyers out there for whom risking a PayPal account to get free product/service is no big deal.
It's not really something a payment service SHOULD be deciding. That's the job of small claims court.
Unfortunately they are a necessary evil until somebody disrupts them.