They want to sell seats to the US government, which buys a lot of them.

But why offer full Y fares at such a discount? Surely they could sell a flexible fare (which I assume the government requires) without all the benefits and advantages that a Y fare carries (I doubt that the government cares about upgradeability and mileage bonuses).

Dunno what the government specifies.

It has to do with the other benefits for Y fares - fully refundable, last seat availability, no minimum/maximum stay, stable pricing, and although it's not listed on the list on the GSA site rwoman linked, another key factor is IDB protection. Having a "Y" fare code significantly reduces the chance that a passenger on official gov't travel will be IDB'ed.

The gov't also has what are called Capacity Controlled fares, which are discounted gov't fares for official travel, that have similar rules to YCA fares but are cheaper, and only so many seats will be available at the capacity controlled rate. When I've been on the capacity controlled fares on DL, it usually books into L or K. They are changeable (if only a YCA fare is available to the flight you're changing to, you do have to pay the fare difference) and refundable.
Example: For SEA-LAX, for which DL has the Fiscal Year 2016 contract:
Full YCA: $145** one way
Capacity Controlled Fare: $65** each way.
**Does not include taxes and fees

The airlines could easily program their systems to not treat YCA fares as full Y fares for UGs, miles, etc. if they wanted. If anyone has issues with how YCA fares are treated by the airlines, take it up with the airlines, not the USG. The USG doesn't care about UGs or bonus miles. But I'm not going to complain. :)

As an example, miles/certs can be used to UG DL YCA fares. However, on AA, I cannot use a SWU on a TATL AA-operated flight.