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What you see in the games isnt the whole city or region. It's only the places relevant to the player. There are more houses in Pallet to house the other NPCs but you dont see their houses because they're irrelevant by the perspective of the player. Kanto in Spaceworld still has everything, but 90% of the Kanto that Red experienced would serve no purpose to the player in spaceworld, which caused it to be scaled down just so they could fit everything else in.
