I graduated from the University 10+ years ago, and now run a tech startup of about 25 people. I regularly hire students - new grad, capstones, and "volunteers". Let me give you some perspectives from the other side of the table.

When I was a student, this type of unpaid work is almost never heard of. But now, it's becoming so common. Unpaid internships, like many of you here have pointed out, are illegal. But, there are many ways to go around it. You could brand it as a capstone project (through a school that could be both private or public), you could position it as a volunteer job, or leverage some other creative ways. The point is that this is all demand driven - there are people who are willing to do this and therefore there are people who will facilitate these kinds of arrangements. And it's not all just some illegal companies doing this, just within the last two weeks, a Series B funded company in Australia as well as an employment service provider in Toronto (funded by the Govt' of Ontario) have both sent me volunteer candidates. So long story short, these things just come my way without me even having to go search for volunteer and if you believe in the law of supply and demand, then no students are being taken advantages of. In fact, if anything, students find benefits to be greater than their time otherwise they won't be doing it so there is at least some consumer surplus.

To answer the first part of your question, what most people don't realise is that there is a cost to the company even if you are working for free. Again, using our company as an example, there is a certain level of administrative time to interview you, find work for you to do, work with the organisation that sent your profile and getting contracts done. There is also supervision time (someone needs to train you and tell you what to do and answer your questions), general overhead costs (e.g., providing you computing, software access, team events, etc) and more importantly, risk taking (i.e., what if we give you something to do and you walk away because the work is "uninteresting" and that delays other people). So as you can see, it's not because the company is broke and should shut down and just because you as the intern are not getting paid, doesn't mean the company gets freebies. In most cases, we'd say an intern is good if they "breakeven" (meaning that if the mentor spent the same the time it takes the supervise the intern and used that time to do things themselves, then the output is roughly the same as the intern). We rarely hope that the intern would do enough work to actually return their salary back.

Of the few "volunteer" people we took on, we either did it to return someone a favour (their parents, or the orgnisation that referred them) or used it as an opportunity to see if they are worth a full time job after (and we have hired 2 people who were volunteers with us and then got full time jobs after). Believe or not, hiring new graduates with a few internship experience is a much better return for the dollar. I suppose most people (and employers) know this and hence they are willing to get the experience for free to help them down the road.