Not just location, but all privacy sensitive API's. The OS should have built in support for segregating location, contacts, calendars, storage, etc. (GrapheneOS does this quite well with storage scopes). As part of this segregation you should be able to redirect the API to a custom implementation.
Thus, my transit app would have access to my real location while Amazon thinks I'm still at home and Pokemon Go thinks I'm on an around-the-works trip to collect location specific items.
You mention Pokemon Go... this would basically be the end of that game, no? That's probably worth the tradeoff, but worth mentioning.
People are already spoofing location, and it hasn't been the end of the game so far. Or did I miss something?
It depends on how many people are doing it though, right? If you make it trivially easy by building the functionality into the operating system—and potentially even prompting people to lie when the app asks for their location—I feel like things would be very different.
You don’t even have to guess about what will happen. We have examples. For instance, someone made a chrome browser extension that clicked through every single ad on the page. It was immediately banned by Google. You could have always built said tool yourself and used it, but the second it became immediately available to the masses it was crushed.