Oh god don't get me started on Morrowind with every character either having almost no dialogue, or knowing the entire lore of the elder scrolls, the layout of the city they live in, every dungeon and person within five miles, and everything about current politics. NPCs were ridiculous in MW>.
Except several of those things aren't true, and if they are, it's by no means a negative.
1. Morrowind NPCs by no means knew the entire lore of the Elder Scrolls. Commoners knew what was appropriate for commoners to know. Priests knew what was appropriate for priests to know. Kwama miners knew what was appropriate for Kwama miners to know. Great House Council members knew what was appropriate for Great House Council members to know. Individuals like Divayth Fyr, Baladas Demnevanni, or Yagrum Bagarn knew what was appropriate for them to know. There were significant filtration layers of what knowledge was. And through those filtration layers, accuracy and inaccuracy flourished as well, just as it does in the real world. The common description of the Tribunal is far more basic and rough-around-the-edges than the priestly description, for instance.
Never mind the fact that most NPCs in the game, when it comes to more advanced lore, are wrong.
2. And why shouldn't they know the layout of the city they live in? Do you not know the layout of the city you live in? Never mind the fact that their cities are infinitesimally small as compared to actual cities, most of these people have lived in their respective cities for a long time. Why should they not know its general layout? Why should they not know where specific well-known locations are?
3. Every person within 5 miles? Incredibly doubtful. Every person for which there is a dialogue topic in their city (which is hardly every person within a city)? Sure. Why not? Again, these cities are small. There aren't a lot of people around. And it's not like the dialogue makes it seem that everyone is buddy-buddy with each other. They just happen to know of people. It's not that impossible or out of place.
Every dungeon within 5 miles? Hardly. The only people who know anything about their less-than-obvious surroundings are 1) scouts and savants who roam their respective roosts frequently, or 2) quest-givers who are expected to be familiar with the area where they are sending you.
4. No, not everyone knew everything about current politics. Once again, there was a sensible filtration employed. Those not directly involved in politics knew the basics and essentials. As you moved up the ladder of relevance, more and more nuances came to light. Now, were a lot of people in Vvardenfell members of one of the Great Houses? Yes. Vvardenfell is an incredibly politically active territory, and it has right to be so. When you have 3 major pseudo-nobility factions who've just been let into brand-new-exploitable-territory for the first time, and they're more than happy to kill the other competitors to get things done, then you tend to have a politically active society, if just for the sake of keeping better-informed to better stay alive or not get on the wrong foot with someone.