The problem with APS-C is that due to the high pixel density, you need Lglass quality to take advantage of that pixel density, yet the normal kit lenses offered fall far short of the required quality.Compact cameras have far greater pixel density than APS-C.
I think it is fundamentally flawed to claim that "designing good lenses for high pixel density is hard/expensive". Just like it is fundamentally flawed to claim that "designing good lenses for large image circles is hard/expensive". What seems to be the case is that designing good lenses for high pixel density and large image circle simultaneously (i.e. "many megapixels") is hard.
I dont think that a good lense for a (12MP) 5D classic ought to be all _that_ different in price from that for a good (12MP) m4/3 camera (aside from economy of scale, shipping and such things). The FF lense would have to cover a relatively large image circle with moderate MTF, while the m43 lense would have to cover a smaller image circle with higher MTF.
One thing you are missing is how easy it is to optimize glass for a given sensor size. Optimizing lenses for a small sensor is actually fairly easy, as the surface area and volume of the lens elements themselves is fairly small. It is quite easy to get optimal center-to-corner performance with a micro lens for the tiny sensors you might find in a cheap P&S, Phone cam, etc. Optimizing glass for optimal center-to-corner performance for larger sensors becomes more and more difficult the larger the sensor gets. That is why high quality glass for MFD cams is so expensive...it really requires a lot of expertise and precision and high-end technology to achieve.
Yes, pixel density in small form factor sensors is very high, as much as 2x higher than the pixel density of the 7D. However the total sensor area of the 7D can be many times larger than that of a small form factor sensor, thus putting a much greater "load" on the lens, especially at the edges and corners. The sample photos I posted are mid-way between center and corner. I chose those pictures because the performance of pretty much any lens at the very center is usually quite ideal...lens performance trends away from optimal as you head towards the corners. When you get close enough to a bird, for example, and actually fill the frame with your subject, the difference between center and corner performance can be quite meaningful, especially if a non-centered composition is ideal. I don't believe there is any question about the quality of top-end L-series glass on the 7D, relative to low-end L-series glass. The difference in sharpness, clarity, microcontrast, etc. is pretty remarkable.