If you haven't tried it already, try the Free Camera mode in the 3D View: its the second button from the left in the 3d view menu. It changes the camera from an orbiting to a free-aiming one, and can get closer to the ground than the orbiter can.
Vertical scale sets the maximum height value possible in the world; All outputs will always be scaled proportionately to this value. Internally WM is simply scaling a 0..1 heightfield to the vertical scale provided.
This behavior is sometimes a source of confusion; if I was starting things over fresh I would change the behavior, but changing now requires doing so in a way that doesn't break all existing world files and more importantly, all devices -- which is a bit tricky.
I'll put adding more/finer zoom increments in the 3D view on my list of features requested; as a very small easy change it has a good chance of being implemented soon.