That's a small-scale example of recycling hardware that would otherwise go in the trash. I imagine programs like Free Geek exist in other cities.
Lots of companies and organizations offer free computer hardware recycling: Apple, Dell, Goodwill, BestBuy. I don't know how much recycling they actually do.
You're describing something more ambitious and labor-intensive. It costs more (in terms of labor and logistics) to recycle old or broken hardware than it does to replace it with new hardware. Breaking hardware down into reusable components or metal scrap is both labor and technology intensive (and so happens in developing-world countries).
Given the huge variation in hardware, peripherals, drivers, etc. I don't think you can just set up some kind of automated process to transform random hardware, possibly broken, into a working arcade machine (or a working anything). Besides the logistics and labor issues, a lot of modern hardware is designed and manufactured to prevent removing parts without destroying them, or replacing parts. Do you have the equipment to replace soldered components on modern circuit boards, and the people to run that equipment?
I don't mind if others try or take this idea but it would work, you can't legally sell the ROMs. You can sell second hand copies of old games you own. I believe you are allowed the ROMs legally only if you own the game so you bundle it up ROMs and physical copy of old game.
How can you ensure that the user won't share the ROM with others.... That part Ive worked out as well. I just can't do everything on my own it's to much with all my other projects as well.
Gaming consoles would be just proof of concept, and it would start to not recycle old computers but repurpose them with emulators to play old games at first. The expand from here. Big wheels turn slowly
