It seems most musicals are set in an alternate universe where no one is phased by the ocasional aria being sung in unusual places. As someone who has on ocasion done this, I would not describe this as a typical reaction. Most people either try to avoid the singer or stare (perhaps mock).

Is anyone planning on addressing the unreality of randomly breaking into song and / or dance?

If so, how?

Uh, no. In my story world, everyone sings.

:-)

But I like your idea.