IMO, that's not really why the PSP Go is a failure. They attempted to switch to all digital downloads in the middle of a system's life cycle. Due to various licensing issues they were never able to get their entire catalog available as downloads. So they wound up with a system that couldn't play all the PSP catalog, yet they still charge more for the system. So why would anyone want a more expensive model that did less than the cheaper models of the same system?
Not being able to buy cheap used UMD games I'm sure played a role for some people, but that's largely only because they made the switch in the middle. If there were no used game market to which to compare then that wouldn't have been as much of an issue. You need only look at all digital download platforms like the iPhone or the success of Steam to see that people will accept download delivery systems if handled properly.
Getting rid of UMDs is a good thing overall. It would make the system even more expensive, make it bigger, and sap the battery life. It's a failed format and would be nothing more than an albatross on the NGP/PSP2.
[edit] Although.... I could certainly envision an external UMD accessory being a viable option.
Granted, there are good advantages to ditching games stored on separate media, but I personally would not buy any game over $25 if reselling it were not an option.
IMO, the digital download delivery system works for the iPhone because the games are so cheap that people don't mind that they can't resell them.
I only use Steam for cheap games myself. Never bought a new release on Steam. Steam also works because the used market for PC games is really bad compared to consoles. You will not recoup as high a % for your games on PC compared with Xbox or PS3. So the fact that you don't have physical media does not hurt as much compared to Xbox, PS3, or PSP.
In fact, one of the reasons I buy cross platform games on consoles as opposed to PC is because I can usually flip them for most of my money when I'm done with them.
Personal preferences will vary, and I'm just one consumer, but I don't think I would buy a PSP2 if the games were $40+ and I could not resell them.