Interesting point. Keep in mind that libertarianism is focused on limiting government, not limiting individuals.
When we see any kind of conflict, we have been conditioned to assume that the government must be the answer. Should we always think this way?
In reality, busybody neighbors already have methods of controlling the grass length, garbage can size, and outdoor shed capacity of their neighbors. Homeowners associations. Right? This is purely voluntary and contractual. People who want to live in this sort of controlled environment can provide this for themselves using nothing more than the free market and contract law.
Then the rest of us who hate busybody neighbors and HOA's (most of INGO) (except Kirk Freeman) can choose to live outside of HOA's and maintain our autonomy.
This is simply an example of a larger principle: Many of the nanny state issues could be resolved by the free market, if we allowed them to be. You just have to think outside the status quo.
When the power of government comes from the people, a confined government won't stay confined when the people begin to value security more than liberty. That's the pie-in-the-sky version.
The real world version is, some people just suck, and some people who suck are exceptionally good at it. When this great ability merges with charisma, free people don't stand a chance. Generations of following exceptionally sucky people with charisma, ruins a confined government. People who crave power always know how to get more.
Some day, if it lasts long enough, the government of that fledgeling libertarian state will be corrupt, if not already.