Why not both?

I separate those because I think the second is a distraction. It seems to me that the primary, and perhaps only, benefit from reducing bad content is increasing the visibility of good content.

Speaking for myself, a lot of bad content would make me less likely to post good content. My instincts tell me -- if other people don't bother here with quality, why should I?

It still seems like there are incentives- better posts will yield more karma- and I suspect it matters who the other people who don't bother are. Right now, we have spammers (particularly on the wiki) who don't bother at all with being helpful. Does that make you more likely to post commercial links on the wiki? If everyone you thought was more insightful than you stopped bothering to write posts and comments, then it seems likely that you would wonder what the benefit to putting more effort into LW was. More high quality posts seems useful as an aspirational incentive.