That's why it is a scandal when it is discovered that papers are inflating their subscrition base. It means that they were defrauding the advertisers.
I do agree that your suggestions would work for most newspapers. It isn't working for small town papers. There are only so many subscribers available, as well as a smaller base of potential advertisers. There are a few businesses from the "big city" close to us that advertise in our local paper, but not many. There is really no reason for them to advertise in our paper, because most people here subscribe to both the local paper and the bigger "city" paper. I'm talking small town, population of 2300.