I recall ages ago having read a theory about this concept of compression. That most game worlds that we see aren't literal, but rather are compressions of the world that characters experience. A city that we see might have just 5 streets, but that's just the city being compressed to a manageable size. For what characters experience, there'd be hundreds of streets. And same thing for NPCs, as you put it. We mostly only see the important NPCs and a small sample of others, but there's many NPCs that really are there for story telling purposes, they just aren't shown.

It's a really good technique if pulled off well. After all, it's really hard to have cities in game. You have to do something to limit it. Either padding it out, making most of it unvisitable, "compressing" it, or... just not having cities. Every option has downsides, but at least the compression approach optimizes for gameplay and your time.