Think inside or outside the box?
In order to immerse the player, game designers build what is called a magic circle. In games, NPC are instrumental in the setting up of the magic circle. Their dialogs set the tone of the world. Their quests teach the player which basic avatar actions (walk, talk, attack, buy) can be used to achieve higher-level goals (leveling, getting appropriate equipments or traveling). Such NPC somehow teach which actions can be done in the society.
A society can be described (maybe not entirely, though) by what it contains or what it supports. In Western societies for example, charity or monogamy are seen positively. But a society could also be described by what it does not support (selfishness and polygamy). In fact, immersing a player in a world with original social rules could be done more easily in showing the player the few "bad" NPC rather than the anonymous crowd of "good" NPC. For example, Jon Irenicus in the beginning of chapter 2 of Baldur's Gate II is being apprehended by the Cowled Wizards. His casting spells and killing people inside the city clearly defines him as an outlaw because of the Wizards trying to arrest him. With this only one cinematic sequence, the player understands his acts will have consequences. The message is understood more directly, meaningfully and intuitively than if it was done by several "good" NPC (eg a tutorial character mentioning in a dialog that "every act has its consequences" or even city Guards saying "I keep an eye on you"). Illustration nearby: covering the entire (white) box surface needs more crosses than marking the (red) box boundary.
A sense of belonging
As seen before, NPC can help the player know the rules of the virtual society. But they also can strengthen the magic circle in giving the player a sense of belonging to this virtual world.
Robert Hercz, a Canadian journalist from the Saturday Night wrote that
Psychopaths are not like the rest of us. In his psychopath examples, he includes the con man, whose real-self is
manipulative, lying, parasitic, and irresponsible. Success psychopath movies such as The Silence of the Lambs or Dexter (TV series) insist on the differences between "them" (psychopaths) and "us" (normal people): they can kill people in cold blood (pun?), they manipulate people without remorse, etc. These differences make us remember that we are not psychopath. Hence they comfort us in our belonging to society.
Similarly, Bergson in Laughter explains that we laugh mainly to compensate for a "bug" in a situation. He gives the example of people not paying attention: stumbling on the sidewalk curb, colliding with a streetlight or falling from a chair one just tried to sit on. The lack of attention is the bug, transforming the attentive humans into stupid and blind machines. Laughter is a social protection.
In video games, NPC designs are most of the time based on the function they provide to the player (quests are used to earn XP, merchants to make money and monsters to complete quests or earn XP) and not on the experience provided. Designing flat true NPC does not strengthen the magic circle. One could argue that in movies, kicking the dog, You have failed me or You have outlived your usefulness followed by the horrified faces of the "normal" people go in this way. To my mind, they are just clichés used to show how really bad the Big Bad is; their goal is not the magic circle. So for games, simple NPC dialogs or actions could easily convey the sense of belonging to the society. Why not seeing a NPC spontaneously laughing at another during an embarrassing situation? If having a lot of money should not be a symbol of success in your favorite MMOG, then why not thinking of NPC who criticize rich players?