Property rights are one of the foundations of a modern, successful capitalist economy. De Soto's "The Mystery of Capital" is a great read about some of the problems that occur when there are no property rights. However, they are one component in an economy, not the component. And, sadly, there is no clear, easy line dividing collective rights from individual rights, although we have a vague idea where it is (communism was a colossal failure, being way too much about collective stuff, and ignoring individuals).
By way of example, in Libertopia, perhaps it would be ok if I ran my own high-explosives & toxic sludge storage business in my apartment? Back in the real world, other people's rights to not be exposed to risk they didn't sign up for trump my property rights. Supposedly, in Libertopia, 'contract law' would take care of things, but in practical terms, how are you going to set up contracts so that you pay the people N meters away M amount for the risk they're taking by being around your munitions storage facility / smoking lounge? It's simply too complicated, and far easier to just have a local law that says "ok, this is not a part of town for munitions dumps".
Most people know it as the law the dodgy lawyers who advertise on TV practice.
It is however a really neat concept that deals with just about anything outside of contract law. It was even used to handle things like pollution in the days before the EPA.
In your example your high-explosive and toxic sludge storage business could easily be sued under Tort law.
Local and property owners association bylaws can absolutely be used to spell out these offenses. However the wider regulation happens, the more it becomes silly.
For example smoking regulations could probably be done a lot more realistically through tort law than through blanket bans on smoking in bars and restaurants throughout a country. Using Tort would allow courts to look at individual circumstances. Thus one punitive ruling against a restaurant on behalf of an employee with lung cancer could effectively ban it. However a similar suit from an employee of a cigar bar would probably be dismissed, because an employee couldn't reasonably expect to avoid second hand smoke in a cigar bar. Thus allowing cigar bars to exist.
One problem with simply suing people who cause damage is that in some cases, it's possible to do a lot more damage than you can ever pay for. For example, if my munitions dump business blows up and levels a city block, killing 50 people, I have no house and no business left to be sued for. I'm essentially broke, and no one is ever going to get more than a pittance from me (I may have even blown up with it). So in that case, it may make sense to prevent the damage before it happens by banning my bad business idea. Of course, you can't prevent everything bad from happening, as that would probably lead to an excess of silly regulation. It is, in other words, a balancing act, that must be constantly watched over and tweaked.
Ok, but at that point, you've decided that the collective benefits of forcing someone to do something outweigh the individual's rights to do whatever the hell they want. How to go about finding the actual compromise that best suits everyone and is most efficient in economic terms is left as an exercise for the reader.
If only it were that simple. The metrics of "best suits everyone" and "most [economically] efficient" almost certainly do not coincide with today's populations, though I would say that the latter would probably come fairly close to a libertarian society (David D. Friedman's _The Machinery of Freedom_ is a book-length treatment of the idea).
If you take a random grouping, finding an arrangement that suits everyone will be very, very difficult, or impossible. The only way I can see to solve this is to make moving to where you agree easier.
We weren't talking about a random grouping though, but about the people who were happily living in some neighborhood when I moved in and decided to open up my munitions dump (I agree that things are a bit different if I were the only one there with my dump, and they all decided to move in). What groups of people we're talking about matter in policy terms - companies, which are far more towards the 'voluntary' end of the spectrum, should be treated differently than local neighborhoods, which should be treated differently from larger aggregations of people (states, or countries).
I guess the word I should have used was "arbitrary". It's going to be difficult to get all of my neighbors and myself to agree on all the rules for our society, I'd imagine. I have no reason to expect that they share more than the most basic assumptions about societal rules.
In the case where we move in and open up a munitions dump, either we signed an agreement not to engage in risky behavior, or we didn't. If we did, we're liable. If we didn't, then it still may be that the folks we bought the land from had, and then they're liable, since they didn't make buying the land conditional on signing the no-risky-behavior contract. Otherwise, buying that land turns out to have been a bad call for everyone else. Of course, once the dump explodes, we're liable for the damage, but as you note, we may no longer be able to pay for it.
Even when I advocate mandatory crime/injury insurance, I don't mean mandatory in the sense that I'm willing to throw people in jail for not buying it, but mandatory in the sense that I'm not willing to interact with people who refuse to buy it, or who are such bad risks that they can't afford it.
That is the original reason, but randallsquared is absolutely right that Libertarian economists from for example the Austrian school of economics believe that complex systems can not be micro managed by a small group of experts.
I would agree that this is another reason, but given that I'm a libertarian for more than one or two reasons, I would suggest that there a great many reasons why people are libertarian (some of which apply to both economic and personal libertarianism, and some of which, like my statement above, only apply to one or the other). There are even some libertarians who don't believe in natural rights or natural law at all. One of the things that makes me fairly confident in my libertarianism is the observation that you can derive it from a number of arguments which don't depend on each other.
