I tend to view (1) as the worst possible option, even discounting the fact that we are completely 100% aware of the existence of false convictions. You are entitled to believe that revenge is a valid society choice, but I will definitely judge you for believing that.
There are two things I feel about this, first is prisons as they are in many countries are really bad for the employees, lots of suicide etc. As a prisoner being put away for years with minimal contact with the outside world is a really heavy punishment even if you live a life without constant fear.
A society that mistreat people is not something to strive for, and making prisons as bad as they can get will affect society as a whole. Paying prisonguards a little extra to take the risk of suicide seems really rotten to me.
Edit: this extends to warcriminals.
And if they are still dangerous, then, yes, you keep them locked up. But even then what's the point of making them suffer beyond the restrictions that are necessary to ensure the safety of the rest of society?
This means removing your freedom to move and not necessarily turtoring you.
No!
Prison should be either removing you from society because you don't fit (being and having act on liking to kill people for example) OR for forced education/correction of social behavior.
Prison in your sense is torture not justice
Likewise, if you take someone as a prisoner, you take then into _your_ custody. You are responsible for that person. You are literally their custodian now. You have an obligation to ensure that their rights are being protected. How we expect for profit institutions to do this on behalf of the state is entirely beyond me.
I would even go so far as to call that cruel and unusual.