Sure, this could be done, but it would add even more options for the users and developers. The reason for the big change in iOS 11 is that developers were requesting Always permissions and not designing apps for When In Use. And often there was no consideration for users who denied the permission altogether. A more privacy oriented option for Apps which don’t need precise location would benefit users but I don’t expect it would be adopted by developers or understood by users.
It is far easier to give users simpler choices. If someone is sensitive about their privacy and don’t want an app tracking then they can deny the permission entirely. An app I built a while back needed a location to display nearby places for the user. It supported users who chose to deny the location permission. In that case the app allowed the user to enter any location they wanted and it would treat it like their current device location. It was seamless. I believe this is the user experience Apple wants app developers to create for their users.
If iOS did try to support a mode to provide an app with less precise location details I anticipate it would be tricky. Coordinates are precise and Core Location wants to give apps the most accurate result it can in that moment. An alternative API may be preferred, such as a sort of regional location which may only be as precise as a 25 mile area, providing some location context but no coordinate, heading, speed or other details. But how would a normal user make sense of this feature versus Core Location? Why would an app developer give up more accurate location options when it is clear most app developers don’t seem to care about privacy? Apple implemented permissions because app developers are not doing a great job with handling privacy.
I think it is best for users to deny the permission for an app if there is a privacy concern and the app should still function well when the user manually provides a location. Perhaps Apple could provide a manual Location Picker which becomes available when the location permission is denied.