Problem with music sounding bad doesn’t really have much to do with the distributed format: V0, V1, or 320 mp3s should sound pretty much the same compared to 16-bit flac. You can only the difference between mp3 and flac at shitty bitrates no one uses anymore (like 120). The reason why a lot of recent digital music sounds bad is because of the intentionally terrible mastering. Since everyone is listening of crappy ear…
More compression and less dynamic range is beneficial for certain environments. Noisy subways. Watching TV in a noisy downtown apartment. Basically, crappy, noisy environments. In those, compression will help you actually hear the music and speech. However, the fact that this should be done in the master is an artifact of an earlier time. Now that signal processing is small and cheap enough to be ubiquitous, music should be mastered for the best equipment, then appropriate signal processing should be done by playback.
The problem is, that there is a lot of older equipment out there that wouldn't be able to do this. So the signal gets compressed before distribution, as a compromise for the least common denominator of equipment out there. Otherwise, a big chunk of the population would think the master sounds like crap. To them, in their particular situation, it would.
EDIT: Come to think of it, the current system, where most music is more compressed, but where the people who care can still get a high dynamic range version, is a very good compromise. The problem is that the latter group's selection isn't quite filled out by the market.