Salisbury's solution to this problem is on the right track but it's not the correct solution. If companies sue for unfair competition, they'll win. Governments should not be ISPs or content providers.
On the other hand, if businesses are so unwilling to provide decent service, the local community standing up a local ISP through the government is a logical choice, though yes, I'd prefer if they formed a cooperative or something. Maybe they can 'spin off' the ISP services in a few more years. But consider that the government is also providing the water & sewer services - somebody else posted the city's audit/budget page, and water/sewer is literally the next page up. They also run a bus system.
In short, it depends on how you view internet connectivity today - do you look at it as a utility or not? If you do, government action, especially when the market isn't responding satisfactory, makes sense.
As for unbundling layer 2 & 3 service*, most areas don't do that - I get ALL my phone service, including long distance, from the local phone company. I don't rent the pipes then pay to have water delivered from a different company, nor with the electric company. I view it as an efficiency thing - is the added competition over layer 3 providers going to improve provision of service more than the efficiency of the local cooperative providing everything? Personally, my thought is that the latter will be more efficient.
*I'm using terminology seen elsewhere in the thread, even though this isn't a very correct way to refer to the split between getting a connection on the MAN and actually getting on the internet.
Capitalism will keep all the private providers in check. There's no way Comcast and it's ilk would behave the way they do if they had to compete for your business.
For the record, I'm a 'practical minarchist', IE 'moderate libertarian', and I agree with you, mostly.
Here's my thought: If Comcast and their sort were providing satisfactory service in these areas, the local communities wouldn't feel the need to create their own networks.
If you manage to so piss off the locals that they, by stint of majority vote, approve the creation of a 'public utility', cooperative, or whatever to provide internet services, I think you should face the consequences. If you sue them because they'd be 'competing', well, tough shit, odds are you were an effective monopoly in the area and you done screwed up. In which case I think that you should not only owe court costs, but a portion of the construction costs for their new system.
Don't want that happening? Actually provide adequate service at adequate prices.