FLOC is being introduced now in advance of privacy features coming in chrome (removal of third party cookie and privacy budget) which apparently will hurt ad revenue. FLOC is supposed to help targeting without exposing user data.

The idea with this proposal is to avoid browser fingerprinting. Cross site cookies are going away and there are essentially two possible paths for ad networks to compensate: a common approach like FLoC is adopted, or ad networks will continue to do ever more advanced fingerprinting based on things that are identify you individually and hard to obfuscate like graphical rendering and audio quirks. The proposal is if Google adopts FLoC they won’t use browser fingerprinting.

Which reality is better is up for debate but they won’t be doing both for the same client.

They will absolutely do both because nothing stops them fingerprinting us otherwise. Anything based on goodwill and hope should be considered false starts.

There's a third option: we make it hard enough to fingerprint users that doing so is too costly when compared to what the ad networks gain from doing it.

Costly to whom?

Fingerprinting already slows down websites, and websites still use it extensively. The cost is paid by the users and nobody cares enough to fix it.

Once again that's not how fingerprinting works... This thing changes all the time so not sure what fingerprint it can generate.