The real issue isn't that the government can't price a service correctly. If anything is unfair about the government providing services it's how they can cut through government policies and basically get stuff done if they want too. Granted, that isn't always the case... but at the very least the government tends not to have to worry about intervention at the same level(city/state/federal). In this case it's city gov vs TWC(backed by state gov) but at the city level once they wanted to deploy their own network they were able to do so.
The real question is why couldn't TWC compete? I think the answer to that is basically lack of focus and they are searching for short term profits. Any large Isp could kill a local network... really it wouldn't be hard. They could bring in so much bandwidth and price it cheaper than the local network. But they don't do so... they aren't willing to take the hit on the bottom line in the short term to lock up the area over the long term. If TWC was a local company that had the powers to do the same things as the Government and the outlook to give up short-term profits for a customer base over the long-term they wouldn't have any problems competing.
As much as you can complain about how Verizon FIOS service is a total lock-in. I think they have the winning move long term. They give you access to massive amounts of bandwidth today, they remove any current POTS service(the lock-in) and they have the headroom to grow in the future. This makes it possible for them to ALWAYS have the bandwidth advantage if they chose to pay for the upgrades. They have been willing to pay for a costly roll-out that should give them long-term benefits.