I understand how the reasoning behind the proper formula works but I'd like to know what's wrong with the above.
The answers given, including one that I posted, do not resolve this point, they only provide derivations by other methods that happen to give the correct answer. Here is an analysis of the reasoning on its own terms.
The principle in question, understood in its natural generality, is that in a plane figure constructed from a "base" (which can be an arbitrary piecewise-smooth curve, not necessarily made of straight line segments and arcs of circles) of length $B$, and with a perpendicular height of $h$ above any point of the base, and the perpendicular segments have disjoint interiors, then the area should be "base x height", $Bh$. The argument for this is that the perpendicular line segments are like disjoint miniature rectangles and these can be integrated into a solid area as in calculus.
This leads to the wrong answer in particular cases, such as a sector of an annulus, where there are two sides either of which can serve as the base, and there is no reason to pick one length over the other as the value of $B$. This indicates that a problem exists, not the origin of the problem.
A closer analysis shows that, for any such generalized rectangle, there are two base lengths (the paths of the endpoints of the perpendicular segment of length $h$ as it sweeps out the figure), and the correct formula is $\frac{b_1 + b_2}{2} \times h$. That tells us what is true about the area, and justifies the comment under the question relating the trouble to the fact that the endpoints of the segment move at different speeds. Still, it does not directly indicate what is wrong with the picture of infinitesimal rectangles all of height $h$.
The best answer is to view the sides of the bent rectangle as paths of the endpoints of a moving segment of length $h$, where the segment covers the figure in one unit of time. If for a large $N$ one slices the time interval into $N$ equal pieces this gives a slicing of the pseudo-rectangle into $N$ small areas. Each small area will be (up to some bounded factor) of order $1/N$, and is another rectanguloid with two long opposite sides of length $h$ (generally not parallel) and two tiny curved sides of length comparable to $1/N$, but these two short lengths are generally not the same. If the "base" curves, that have lengths $b_1$ and $b_2$, are smooth, then the curved sides of these mini-rectangles can be replaced by straight line segments between the same points. The error in calculating the area and length in each quadrilateral is of order $1/{N^2}$ and therefore (when adding $N$ such) will not affect the overall area calculations when the limit of large $N$ is taken, and it also does not affect the results if the vertices of the quadrilaterals are moved by amounts comparable to $1/{N^2}$. The crucial point is:
( up to an error of order $1/{N^2}$ in the lengths of the sides and/or the positions of the points, an error that does not affect the end result )
- the small quadrilaterals have the shape of isosceles trapezoids with long sides equal to $h$ and unequal bases.
The inequality of the small bases, meaning that the ratio of their lengths tends to a limit different from $1$ (and varying from point to point on the base) as the sides of length $h$ approach each other, is the same as the remark about length being accumulated at different rates on the two bases of the rectangle.
The figure being a trapezoid, that is, the parallelism of the small but unequal segments, is a more subtle property and reflects the fact (that I will not prove here, but is true) that the osculating circles to the two "base" curves at the endpoints of the moving segment of length $h$, always are concentric. This is part of the theory of evolutes, involutes and parallel curves, all of which are covered in Wikipedia.
The upshot of all this is that any curved rectangle figure to which the "base x height" argument applies, is the limit not of a collection of small rectangles, but of a strip of thin isosceles trapezoids of side $h$ (and with varying and unequal base lengths) chained together along the $h$ sides. The construction of a circle as a limit of triangular pieces is a special case.