What is a legal copy?
A legal copy would be one that is created by the copyright holder. An illegal copy would be one that is created without the copyright holder's permission.
Libraries/Music Resellers/Storefront Swaps offer what you deem as licensed copies that they haven't paid for. Royalties don't go to the industry.
You're confusing "paid for" as synonymous with "licensed." If I legally obtain a copyrighted work -- a CD, a book, a DVD -- I can do with it what I want. That includes reselling it to someone else, who can resell it to someone else, or give it away, or poop on it, or use it as a doorstop, or whatever. THEY JUST CAN'T MAKE A NEW COPY OF IT.
If this point is still confusing you, you may want to do a quick Google search on "doctrine of first sale."
As for time-shifting: The legendary Sony v. Betamax case was applied by the Supreme Court uniquely to television broadcasts, which were treated as distinct events. It was not intended to cover other forms of copyrighted work.
I can sell, swap, borrow and buy used music. Now, explain why downloading is different?
Well, to be honest, this is kind of frustrating, because it's been patiently explained in great detail throughout this thread. But here goes again: When you "sell, swap, borrow and buy" a CD, you are dealing with a licensed copy of that disc, created by the copyright holder. It doesn't matter how many times it goes on to be sold or swapped -- it remains a copy that was licensed by the copyright holder. But when you download or upload music on your computer, you are reproducing and/or distributing copies that were not licensed by the copyright holder.
CD you buy at Joe's Used CD Shop: a licensed copy.
Song you download on Kazaa: an unlicensed copy.
All very simple.
Wrong.