The latest version of Cabal (1.18) includes built-in sandboxing support, which alleviates this problem to a significant extent. Prior to that, there were/are tools [^1][^2] for doing the same thing external to Cabal itself. Dependency hell has without a doubt been problematic with Cabal, but it is fast becoming a solved issue.

[^1]: http://hackage.haskell.org/package/cabal-dev [^2]: http://hackage.haskell.org/package/hsenv (Disclosure: I am the current maintainer of this project, though I am happy to see it becoming obsolete)