Even to allow tori to continue with a wrongly executed technique might be dangerous. In that situation be even more aware of your control (Budo!). It is often in these situations where 'accidents' happen....
It ALL depends on the situation. When I (after 18 years of Aikido and 8 years of Judo) practice with a person in his or her first month or so of practice, I let them do the movement even if they're not perfect, but they have to be doing something that resembles the movement principles being worked on at the time. I don't let them do anything that's going to hurt me - or them.
After a few 'trials,' I'll start making it harder for them to do it 'wrong' and quietly suggest why a different movement would be more effective in making me move in a way that I can't resist (others, younger and more flexible might be able to but I haven't been 22 for a very long time).. Or (and I prefer this) I'll ask the sensei to help my partner figure it out.
WRT the early tap out... The shihan in question ALWAYS released the pressure the moment I tapped, on the few occasions I was his uke. He'd ask why I tapped so early but I'd reached the end of my range of motion and back in the judo days I'd had a lot of injuries, making the neck/shoulders tight.
WRT the person with/on whom he was demonstrating in the situation described above, we were all wondering just how far he was going to go, but in truth uke (a sandan) was tapping out of a nikyo pin about 1/3 of the way into the pin, and about 1/3 of the distance the shihan was able to take him before reaching the "ok, now you're being stretched" point.. That, too, depends on the situation. The uke was/is being developed to be a sensei.
Anyway - the incident in question was about a decade ago and the shihan in question has gone to meet his makers - kicked the bucket - cast off his mortal coil. He was VERY traditional in his approach to martial arts - most of the time he'd show the 'modern' technique, and then occasionally show the 'in the old days we did this...' without actually finishing. i.e., when pinning ikkyo (ikkajo?). He'd say 'in the old days we did this... ' and his demonstration would include pinning the elbow, and lift his other hand up sharply, but letting go of the pinned forearm... He ALWAYS said not to hurt uke, though, because we need people to practice with.