Grade I doesn't require surgery. Grade II is questionable. Grade 3 and 4 are required. Depending on the situation MLP can also cause ligament damage. One of my past coworker's Pomeranian had Grade 3 and had the surgery.
Generally, I would take the Vet's opinion. Perhaps talk to another Vet for second opinion if you don't feel confident in his determination. Even if we have a qualified Vet on the forum, the only qualified person to make the best reccomendation is a vet who has inspected your pooch directly.
Some things consider, that might affirm your Vet's reccomendation or lead you to seek a second opinion or question your current Vet- how old your dog is, expected lifespan of the breed, how active he/she is at this point, and how the injury is currently is affecting your dog. If your dog is young and active, I would presume it's probably a smart decision. If he/she is older, less active, then you might be able to get away without the surgery. Arthritis that develops may be able to be managed with medicine.
I would in human medicine, not veterinary, so you should ask your vet about how effectively the condition can be managed pharmacologically, which would theoretically cost less. I do know some of the common dog arthritis drugs have effects with long term- such as liver issues (Rimadyl) and GI bleed (any of the NSAIDs, just like with humans).
Dogs can work with 3 legs just fine functionally speaking- they adapt really well. That said, you don't want him/her to be in pain (either from the M.L.P. or the subsequent arthritis). Also consider the surgical recovery complications of your dog is older. Lastly, if your dog has any complicating factors that would make skipping the surgery worse (if he/she has a breathing issue, limping, that expends more energy, requires more breathing, worsens breathing issue).
Additionally, it might be worth asking your doc how long you can put off the sugery before the dog starts to incur negative consequences. That might give you a timeframe to see if he/she recovers without intervention.
Sorry to hear your pooch is injured. Best of luck!