Game devs take on the problem by themselves by not releasing a server component. Older games used to release the server component, so people could self host or make their own ladder system. That allowed each community to come up with their own set of rules and restrictions for how much moderation was desired. But in the modern era where the game developer controls the server everyone is subject to a single set of rules.

It used to be standard practice for ISPs to host a bunch of game servers too, to minimize latency and cost.

That helps but there's still a huge burden on the community who end up having to self moderate. I think one of the biggest issues today is that cheating is not so easy to uncover anymore. It could just be rose tinted glasses or just lack of knowledge among the public about what cheat developers were up to but 20 years ago I don't really remember it being such a prevalent issue. I'd see rage hackers, spin botters, people blatantly using god mode or flying out of bounds or wall hacking but never heard much in the way of the kind of culture that seems to be prevalent now. It feels like there's plenty of extremely subtle cheats out there today and even "microcheats" that don't do much other than tweaking certain values by 10%~ in a way that gives a significant advantage to players with enough skill to leverage their play style around that without it being obvious that they are in fact cheating. And you'd go paranoid trying to catch them out because people are much more clever about how they use them.

I don't think you intended to be that specific, but the developers don't make any decisions at the level of "releasing a server component" thats an upper management/production leader decision.