You've pretty much answered it yourself.
Very large telescopes are expensive to build, and there are diminishing returns for large instruments operating under Earth's atmosphere.
Air turbulence (what is known as "seeing") limits the resolving power of the telescope - its ability to distinguish small details and make high resolution images. It's an essentially random phenomenon, so sometimes it gets better, but generally speaking large instruments are more strongly affected by turbulence.
Light pollution is the glow caused by all artificial light sources (city lights, industrial lights), which are making it difficult to see very faint, very distant objects. It is drowning the faint objects in artificial glow.
The bigger the telescope is, the better its resolving power, and the better its light gathering ability (the ability to see faint objects). But seeing and light pollution are affecting both. You could fight seeing with adaptive optics, with decent results. You could fight light pollution by installing the instrument far from cities. Or you could fight both by launching the instrument into space.
All these solutions cost money. Large instruments are expensive. Adaptive optics are expensive. Running an observatory in the middle of nowhere also adds costs. Finally, launching things into space is not cheap either.
However, each one of these methods is used in one case or another. For each kind of application, astronomers need to make a decision for what methods they could use to improve performance, and then match that up with the money available to the project. It's a complex overall decision that takes a long time, lots of discussions, often politics gets involved, etc.
So what gets built is a compromise between what astronomers want, and what is actually doable from a financial, political, and technological standpoint.
BTW, "magnification" is not a parameter that astronomers use to define an instrument. Any instrument can give you any magnification you want - just use a different eyepiece. The relevant parameter here is the resolving power - the ability of the instrument to distinguish fine details. This depends on the instrument size - the diameter (or "aperture") of the telescope. Bigger scope = better resolving power (all else being equal). As I said above, seeing (air turbulence) is a major limiting factor here.