From an FAS report (interesting read) on the potential use of shoulder-fired anti-aircraft missiles against passenger aircraft, a little bit of bureaucratese:
“the penalties of dropping incendiary flares on populated areas near airports are prohibitive.”
Well, I certainly can’t argue with that.
Yonatan Zunger’s Blog 
One would hope they would be.
What about dropping them on other populated areas?
“Well, housing costs in this area are a bit lower since it’s been rated as safe for the dropping of incedniary flares during aircraft overflights…”
Actually, the risk is near airports where planes are closer to the ground and, therefore, within range of shoulder-fired missiles. This means that planes would deploy flares close to the ground (near take off) and the flares will not have burned out before hitting the ground.
If the plane should need to pop flares while at cruising altitude, the flares will have burned out prior to hitting the ground. Therefore, there would be no problems dropping them on other populated areas.
Although I’d suggest that dropping any sort of objects on a routine basis from aircraft onto populated areas is likely to be a bit of a problem. The whole “blunt trauma” thing.