It shouldn't be a combative debate where people insult each other or threaten to leave the game or not run the game or whatever.
But I think it's fair of the DM to ask the players what they want to play and give them room to play that.
Sure. But, the question becomes, is the DM obligated to provide them exactly what they want? Because, if he's a bad DM for refusing any particular request, then its the same as saying he's obligated to provide that.
I think its a given that any campaign begins with some sort of exchange where the DM provides a very basic sketch of the setting, and then begins asking the players what they want to play. As the process proceeds, the DM and the players exchange more and more information, "I want to play an elf.", "Sorry, no elves.", "Well, what can I play that's a little elf-like?", "Well, in what sense. What particularly attracts you to an elfin character?", and so forth. Eventually, the character learns enough from the DM to find a concept that suits them, and the DM learns enough from the player to guide them towards options within the available setting (flavor) and rules (crunch) that will help the player achieve their goals.
There should really be no argument here. The DM shouldn't respond to a player proposition like, "I want to play an elf.", with, "Oh, don't be so lame. Only losers play elfs.", even if the player phrased, "I want to play an elf.", as "I want to play a drow elf ranger that dual wields scimitars." The player shouldn't respond to DM information like, "Sorry, no elves." with, "What? That's not fair. Why can't I play an elf? What do you have against elfs? But elves are part of the core rules!" This is not a contest. It's a not a debate. I don't know what Hussar's experiences are like, and I suspect that the heart of our disagreement is a difference in experience, but I've seen far more players take the combative, "Why can't I play an elf?" stance, than I've seen DM's take the combatative "Your character idea is lame, think of another one." stance.
I very much think however that there is a world of difference between, "Your character idea is lame, hense you are lame." and "Your character idea isn't appropriate to the setting.", and I don't think a DM is obligated to explain in any great detail why its inappropriate or justify the choices that he made when he conceived the setting. If the player demands that the DM justify his setting choices to any degree, fundamentally, the player has taken the stance, "Your setting is lame, think of another one."
Now, that isn't to say that the DM can't justify himself if he wishes to, but frankly, I might not want to do so simply because I don't want to slow down the already dull and time consuming process of creating characters any more than is necessary. I don't want to have to explain that halflings are gone because I felt they were too tied to Tolkien's creation specifically, and that I specifically choice 7 PC races because I liked the number 7, or that initially back when I first came up with the campaign I was facinated with the idea of each of the races representing one of the 7 classical stages in the life of a man and that hobbits didn't seem to fit. In particular, I might not want to explain that last part because I never quite got it to fit, and so its a somewhat discarded idea that doesn't really reflect the campaigns cosmology as much as I would like, but that I'm still happy with 7 'free peoples'.
And in any event, whether I can justify my choices or not, I shouldn't have to. I certainly shouldn't be expected to justify my aesthetic choices to the satisfaction of someone else.
The ironic thing about this is that I consider myself to be very open to exotic character concepts. Take for example the aforementioned 'silly' idea of a half-warforged half-dragon red wizard of thay. I would have to explain, "No, sorry, there are no warforged. Half-dragons are too powerful and too rare make a good PC concept. At the least, you'd so monsterous in appearance that you couldn't survive low levels of play anyway. Finally, there is no 'Thay' and so hense no red wizards from there either." However, the concept itself of a draconic sorcerer with a golem-like body is a perfectly interesting one that is likely to entertain me, and one I'd be perfectly willing to work with a character to achieve provided that the character's motivation for wanting to play a character like that wasn't simply to achieve mechanical advantages. In other words, if what was driving the desire to play a half-warforged half-dragon red wizard of thay was the desire to create a character of with a great deal of power relative to its character level, then there isn't much I can do to help with that. I'm not going to bring something into the game whose sole purpose as far as the character is concerned is unbalancing the campaign. In my experience 90% of the time someone wants to play something exotic, mechanical advantage is the driving force behind the desire. I am though perfectly willing though to help a player explore a particular idea.
So in the case of the half-warforged, half-dragon, red wizard of thay, I'd make something like the following pitch, "Ok, there is nothing exactly like that in the campaign world. However, Sorcerer is a very flexible class, and may I draw your attention to the Draconic bloodline feats. If you take that, you can eventually breathe fire, exude dragon fear, and so forth. If you really want to play up your draconic heritage, you can take the Misanthropic disadvantage. It would seriously limit your ability to interact socially with other humaniods, but you'd basically be able to treat any unintelligent dragon as a pet, and at higher levels you can get intelligent dragons to treat you as another dragon. Finally, there is no warforged race, but there is nothing that would stop a powerful spellcaster from replacing lost body parts using golemancy. If you want a metal body, take 'craft wonderous item' when it becomes available and start making one. You'll be playing a character that is inherently an outcast but if you can steer your roleplay in such a way that you minimize as much as possible the risk that this turns into a solo campaign about you, then I'm all for the concept."
Of course there will always be situations - campaign settings - were certain things just don't fit - but of course, if a player wants to play something not fitting there, maybe he is in the wrong campaign or the DM is running the wrong campaign?
I try to be open to wierd ideas mainly because obvious hooks like that tend to make for entertaining situations. But I'm not going to disrupt the balance of play to accomodate anything, nor am I going to just accept willy nilly something that doesn't fit with the overall aethetic I'm going for (regardless of what I'm playing). If a player doesn't like my aesthetics sufficiently that they feel compelled to question or argue with them, then they are almost certainly playing with the wrong DM. There are a couple times I've said, "Thanks for the game.", and then never came back because I didn't really enjoy the game. However, I've never set and argued with a fellow DM about their campaign or how they ran the game. DMing hard enough work without them getting grief from me.