I run into that "what do you mean, you didn't pay to publish?" thing here too.. and I'm in S. Jersey, only 100 miles from the publishing capital of the USA, perhaps the world (NYC). Many, MANY people have no idea how it's supposed to work. I've found more than one person who I've steered away from PA and onto the right path.
I think the notion became predominant when people just start googling "Book Publishing" or "Publishers" - because the top links invariably come up as vanity presses. So it's not hard to see where the public at large, who has any interest in publishing a book, comes up with the notion. I, who grew up around books, kind of knew how it was supposed to work, I just had to dig for the information. At least I knew the names of the "big" publishers. But not everyone will do that, nor pay attention to publishers names on the books they read.