That's a valid point. I play at Emperor, and the AI is so poor that a city settled too close to me is just the part of my empire my tax collectors haven't reached yet. In general, I don't think the problem with the AI is that it's too aggressive, but right now it just throws Settlers away.
yeah. it's a great idea on firaxis' part to cut off the player's land expansion, but it's just too extreme right now.