The subfolders thing used to be there but it was changed - I forget the reason why but I suspect @PhilETaylor will know.

The problem with the subfolder was/is, that the "recursive" option breaks the dropdown (as it is currently wrong implemented, that's why I added: https://github.com/joomla/joomla-cms/pull/35931/files#diff-b20a03c7bebd0a7b7ae0b5de9486009ec060a89a12542421578ae22251e5d707R162-R167 ) and I'm absolutely not happy with the current solution (but it's the best Joomla! can do beside offering a normal text field).
Also the local adapter had a bug when loading subfolders.

ACL for this is great but are you sure Access Levels is the correct way? Thats for controlling who can view something. I would have expected it to be using groups which is more fine grained.

Access Level only decided who can view the folder
Real ACL with groups would also enable control over who can add,delete media in a folder

Example

images/logos

anyone can use the images here but they can not edit or delete them without the correct permissions

images/marketing

these images can only be accessed by people in the marketing group who can do what they want with them

images/public

anyone can see, use and update images here

If you split this into 2 pr (subdirectories and acl) then they can be addressed separately. The acl is a bigger issue that subdirectories. My 2c

I have tested this item ? unsuccessfully on ed80823

I am not sure if I understand the scope of this PR properly and I think it's a great improvement but in my opinion, it needs some work. Also I have found some a11y issues:

Permission issues

1. When you set restrictive permissions to a subfolder but loose permissions to the parent folder, you can access, view and manage content in the subfolder with no issues.

1. When saving conflictive configuration in the plugin, at least if loose permissions are last, they prevail over more restrictive permissions

A11y issue

1. When you have different folders configured, you cannot access them using the keyboard as tabindex = -1 for all of them. Also subfolders cannot be accessed in the tree area.

Edited to add screenshots

ACL for this is great but are you sure Access Levels is the correct way?

In theory, ACL permissions are the correct way to do it, but the limitations are, that you need assets for them, which means, that we have to create DB entries for the folders (and files) which is not a good way in general for folders/files here. It's also not really forseen to make things with the toolbar buttons etc. + there is just no interface to manage permission here.

edit: although how it's implemented now, it's not that wrong, it defines, if you "see" an entry.

Permission issues

When you set restrictive permissions to a subfolder but loose permissions to the parent folder, you can access, view and manage content in the subfolder with no issues.

The entries are "positive inherit", means when you have access to a folder you have always access to all subfolder.

A11y issue

When you have different folders configured, you cannot access them using the keyboard as tabindex = -1 for all of them. Also subfolders cannot be accessed in the tree area.

#35911

The entries are "positive inherit", means when you have access to a folder you have always access to all subfolder.

But for all other permissions in Joomla we always do "negative inherit", don't we? That might be confussing. Also I think it might be an issue in some configurations as you usually provide All permissions to /image but you might want to "hide" some subfolders for some users.