Paypal is indeed horrible in too many ways to enumerate here. I wholeheartedly share your disdain for Paypal.
Having said that in this case it might not be their fault. There could be more details you left out, but going by the story you laid out, it sounds like you were left to bear the loss just as any brick and mortar or online seller would have to, when accepting credit cards. I don't see this as a Paypal issue from what you describe. This is the way credit card issuers (financial institutions or banks) and the credit card companies (MC, Visa, etc) have set up the game to where they come out on top no matter what. It's just part of the credit card game.
Credit card companies sit at the top of the food chain, and banks have to agree to their terms if they want to issue credit cards. Then come banks on the second tier, who are pretty well protected as well. The customers are protected only because they want people to use the cards and demand all stores accept cards. So who gets left holding the bag? The sellers / stores. When credit cards advertise protection against theft, unauthorized use, blah, blah, in an effort make people comfortable with using and carrying credit cards, the losses are all born by the sellers, not the credit card companies or issuers. The stores / sellers have no choice in the matter because they can't survive without accepting cards, and have to agree to the MC, Visa or whatever CC company rules.
Even on eBay, how difficult is it going to be to sell your items if you didn't accept payment by credit cards (processed by Paypal on eBay). Imagine how many bidders you will have if you only accepted money orders or something. I know this was a choice on eBay many years ago, I don't even know if it's a choice anymore now that eBay has acquired Paypal. Bottom line, it sounds like, once Paypal tracked the transaction to a credit card, then credit card rules come into play, and you as the seller took the hit. With stores, brick and mortar or online, I suspect these losses are ultimately passed on to customers in general, just like shoplifting losses are, in the form of higher prices.