Bill Fischel has just posted his "Fiscal Zoning and Economists' Views of the Property Tax." As usual, Fischel provides a great summary of the problem. We get zoning for fiscal reasons. Yes, when it comes to nuisance control, the common law offers "retrospective remedies" and these may not be adequate. But economists have established a more plausible rationale for fiscal zoning, emphasizing it over conventional arguments re nuisance control.
There is a lot to learn re-reading Robert Murray Haig's 1926 essay on the topic. Haig argues for zoning in the traditional way. "A glue factory on the corner of Park Avenue and 50th Street might show a net profit, considered by itself and ignoring the losses of its neighbors" (p.433). This is the version that has made its way into popular discourse and many people still buy it. I seriously doubt that glue factories would have been located at that address even in the 1920s. Land markets do not place glue factories where they have no business.
The fiscal zoning story is better because it is a political economy story. Rather than a panel of wise men and women coming together to do "Regional planning, based on economic analysis ..." (Haig), there are a bunch of self-interested people politicking (fighting) to get the zoning that is best for them.
This morning's LA Times includes "Westside development fuels debate over growth -- smart or otherwise." One simply cannot read it (and a thousand like it) without thinking of Bruce Yandle's bootleggers and baptists.