Your first point is simply the tired old ideology of "government bad, private enterprise good". Municipal governments already run a number of public utilities which are far more important and critical than broadband, so there's no reason to think they would not do a good job with internet.
Your second point is just plain stupid. If a government makes it lawful to snoop, it won't make any kind of difference who controls the servers - ISPs are not going to start breaking the law of the land on behalf of their customers.
For sake of argument, let's say that everyone's abiding by the rules and the government's ultimate goal is to have as much access to private data as possible. Which method do you think is easier?
"We're doing you a favor!" - own the network by marketing ridiculously cheap subsidized internet with extremely high-speeds.
"We're taking away your freedom" - change the rules by forcing privacy-violating legislation past the house and senate
This is a strange mixture of paranoia and naiveté. On the one hand you suppose that the government's goal is to snoop on everyone, but on the other you ignore that they have already been caught doing that with the willing participation of private telcos. (FISA, warrantless wiretapping, etc.)
Putting telecommunication service in the hands of municipalities reduces the possibility of diabolical eves-dropping schemes for all the same reasons that it's less efficient than private enterprise: it's decentralized and it's run by incompetent local government.
Your second point is just plain stupid. If a government makes it lawful to snoop, it won't make any kind of difference who controls the servers - ISPs are not going to start breaking the law of the land on behalf of their customers.