What an interesting thread this is!
I think it's totally fine...and necessary...for parents to give children creative choices, but within an appropriate range of their clothes...some for school, some for parties, and "dress up", in a big bin. This gives the child some sense of choice, self-expression and control but also, they learn that they dress for others as well as themselves.
Kids can be so cruel with each other, but I don't think saying "If you wear that, people will laugh at you or make fun of you" is helpful. That just makes kids afraid of other kids, and who needs more of that. Instead, setting the boundaries before it ever comes to that will help our child feel comfortable...enough like themselves and enough like everyone else. It's a balance.
In the case of this boy, if he were my child he'd have to dress better for the party and wait to wear the costumes until he got back home.
Isn't that what we always complain about here at YLF that people DON'T dress as if others see them? ..and with little regard for the appropriateness of the situation ? ( I recall the pajama wearing in a courtroom thread). Well, where do we learn it? And isn't this notion that we should wear "whatever we feel like" one of the reasons that people dress so badly now? I think we have to dress consciously and kids can be introduced to that idea with no harm to their creative spirits.
It's that whole "looking the same vs. standing out" argument we had on that other thread. Children aren't that different than us in that having fewer choices is often much more helpful and less overwhelming, just my take on it. Setting boundaries is a way of caring.