Insider trading around Warren Buffett seems like a really odd example. More typical would be company employees knowing the quarterly results before they are published. And there, it's easy to see how the law is protecting the public by leveling the playing field.
Technically the law is protecting the share holders. Legal scholars, regulators, and even judges have continually tried to push the fraud-on-the-market theory of insider trading, but IIRC it's been firmly rejected by SCOTUS multiple times. There are statutes where the fraud-on-the-market principal pertains, but for your typical insider trading case predicated on Securities Exchange Act jurisprudence, it doesn't fly. Courts have said it would sweep far too broadly and significantly expand the scope of criminal liability (e.g. end up in prison for trading on something you overheard at the coffee shop). As insider trading law has been largely constructed by the courts (the statute its rooted in says nothing about "insider trading"), Congress would have to be explicit about a further expansion of criminal liability.
Yes. And there's also no bans on equivalent 'insider trading' for foreign exchange nor commodities. And markets in these work just fine.
Some economists suggest that insider trading is good for public markets, because it disseminates information. (However fiduciary duties would still apply. But they would only allow the company to sue the vice president who told her golf buddy about the upcoming earnings, but could not sue the golf buddy.)
