In one of the bonus strips to Book three, two of the Paladins point out to Miko that they are specifically not the police; they are a secret order of Paladins and they do not have jurisdiction over petty crimes, like waiters throwing dice on the back steps of a restaurant. The Sapphire Guard existed solely to protect Soon's Gate; one of the ways they did this was by patrolling the walls of the city, but they didn't fight crime.
There are only two canonical examples of a cleric or paladin trying to root out evil based on the detect evil spell or ability: The Kingpriest of Istar, who was the high priest of Paladine on the Continent of Ansalon (home of the "Dragonlance" saga) and Lady Elena Faith-Hold, a fallen Paladin and the Darklord of the Domain of Nidala in the "Ravenloft" campaign setting. Both the Kingpriest and Lady Elena launched crusades against "Evil" in the names of their respective gods (the King-Priest for Paladine, Lady Elena for Belenus), and they were both punished by their deities: Istar was struck by the Cataclysm, and the Gods turned away from the people of Krynn for centuries; Belenus stripped Lady Elena of her Paladin abilities; when she continued her Crusade, the Dark Powers drew her into the Land of the Mists, making her Darklord of Nidala. The Dark Powers restored Lady Elena's powers (albeit as a Blackguard) but they put a special twist on her detect evil power: she is now capable of detecting any strong emotion (hate, love, happiness, anger, sadness, etc.) but she always senses these emotions as if she were detecting Evil.
In short, using the ability to detect evil in this manner is an abuse of the authority a divine caster (especially a paladin) has received. It is a tool, just like the Paladin's mount or holy sword is. Just like there are times that the paladin's mount wouldn't be helpful, or a paladin would cause more harm than good by drawing her sword, there are times when using detect evil is either self-defeating or harmful. There are also times when it's very useful to have; that's why the Dark Powers have banned its use in the Domains of Dread.