Quote: As far as I know, the system isn't used everywhere. So if you're in a town, you'll see everyone and be able to do anything MM there, or throughout the various open lands. I'm not sure how often this system is used, but it sounds to me like it's limited to the Dungeon Crawl type areas.
Town/city = see everyone.
Epic Dungeon = entire dungeon instanced.
Standard Dungeon = only "boss rooms" instanced.
This makes sense as if your party was entering an epic dungeon (Black Rock Mountain), it would totally kill the atmosphere for it to be crowded with other people. You are supposed to be entering this dangerous, ancient, mythical place after all. Therefore your party should be all alone to enhance the feeling of isolation.
In a standard dungeon it is logical that you should run into like minded adventurers. However if the whole reason you were going into a dungeon was to get the treasure from the boss mobs, then you don't want to wait in a line to kill them. Also instancing the boss room allows for customization and scripting of the boss mob fight that otherwise would be impossible in a non instanced environment.
In a city you want a busy crowded environment.