Like I said, whether it creates conflict or not, (which is unlikely by the way) either of both consequence, or more doesn't over-weigh the prospect of people leaving the site. Obviously the latter isn't always the case. It's however always going to be met in some cases.
In a way, am speaking out of exposure towards the outcome of implementing block option in a community. You have listed some of the possible consequences that happens after the end of implementation, which I asserted in both parts of my response is unlikely. Other than the reasons I pushed forward as a substantive data for my claim, there's also my personal vindication of the option using my experience as a basis. The communities I have been, usually make use of the block option, preventing the possibilities of hostile intentions generated by either side of a party. By now you should realize my stance inclines me to list some of the positive effects of using the option. It reduces heated arguments in the form of ad hominem. More so, it discourages the use of profane words, which is a catalyst for a ban on any site.
In the case of taking responsibility and reporting a member; that's a good idea, but it's not a quick fix. Reporting someone won't stop the offenders from discontinuing his/her attack immediately. There's also the fact the arbitrator won't see the problem as you do. For example, I may get offended because of a remark made by someone. To others, especially those behind the judicial frame, they may have the perspective that there's nothing wrong with the remark. Subjectivity is the main player in this, and it influences both side of the interface, leading to an almost inevitable differentiation in viewpoints. In conclusion, I think the block option is every bit of necessary, which is why almost every online communities uses it.