Its main use is to kill Gnat swarms and Rabid Beetles. Gnats cannot be killed with a regular weapon (unless they are frozen beforehand), while any Rabid Beetle that runs through the cloud will die instantly. It can also be used to ease a fight by reducing the health of enemies a little bit.
Another Use of the Bug B'Gone is to kill most bug-type creatures. Currently, the cloud this creates will apply "strong" poison to Weevoles, Scorpions, Mants and Mosquitos, which cause them to take 60 damage directly, and then take 30 damage per 10 second.
The cloud is harmful to the player too, as it will cause them to take 5 damage per second from poisoning for as long as they stay inside the cloud, similar to staying in the Gas Rainforest biome without a Gas Mask. Note that the player can stay in the Noxious Cloud without taking damage if they wear a Gas Mask.