It's the Mayor-from-Jaws problem. No politician wants to be the one who puts a bunch of local businesses into bankruptcy and makes a bunch of employed people unemployed. Even when the circumstances mean not doing so will cost lives, it's still really, really hard for a politician to do that. It pushes against every instinct in their nature.
This appears to be an attempt to split that particular baby, Solomon-style. I suspect it will work out less well for them than it did for Solomon.
Yes, many small business owners are freaking out about how much time they have before they go under. There are, however, ways of addressing those problems that elected officials are considering -- for just a singular example, loans.
As far as I know SF was the first city to declare a state of emergency a few weeks ago to begin preparing for this, and was widely mocked in political forums for panic. I am not a fan of the city administration and think the 1000 person limit is over-optimistic but it's unfair to suggest the city is trying to ignore or minimize the problem.
This appears to be an attempt to split that particular baby, Solomon-style. I suspect it will work out less well for them than it did for Solomon.