What are you limits of realism in our sim?
Mine is when the objects close to the tracks reflect and cast shadows, don't float above the ground, and have bad textures up close. I can live without grass clumps, well maybe the newer grass is better, but in the old days good textures did the job, besides the compromise between good performance and a super realistic scene. There is no need for fire hydrants on every city block and manhole covers on every street.
Is it at the point where you can't see the difference? I'm sure creators could add polys to objects so that the smallest details are models at the cost of probably bringing the most powerful computer to its knees. And then unless you approach really close, you wouldn't even see it.
This is fully understandable and there are definitely points where the perception between an actual 3d object versus a high-resolution texture is nil. Using effective normal mapping, working parallax and PBR texture technologies that use the GPU efficiently, is the way to go.
Do buildings and other structures need fully modeled interiors?
No. There is no reason to create all the objects inside buildings. If it can't be seen, why go through the effort.
Does every object have to be 3D or can 2D planes with some fancy textures be acceptable?
Not every object has to be 100% 3d. There are places and situations where, as I said above, that good texturing can be convincing if the parallax and PBR technologies, bump mapping, and normal mapping are done well. It maybe a bit more difficult working the textures, but let the GPU do the work rather than the slower CPU.
Do people and commodities have to be seen to move smoothly from one location to another or is the start and ending enough with your imagination filling-in the gap?
No.
I was never interested 100% in the interactive industries because they're a pain to setup. If it was a matter of opening up a single panel screen, it would be nice, but needing to click on each and every traincar, industry, etc., it gets pretty tiring so the only time I worry about commodities is when I can see them such as open loads found on flatcars, open gondolas, and in hoppers. For boxcars and tankcars, they move "stuff" and I use the instant load to load whatever they carry by default to add weight.
The passenger stations are there and the interactive nature still isn't quite worked out like it should. Heck, we're still using 2003 TRS2004 SP2 technology here. If the passengers walked off the platforms, it would be a bit nicer. More recently I've gotten away from the interactive stations and have gone back to the old-fashioned track marks. It's not much more difficult to setup, and it looks better overall as I've been substituting my interactive platforms with splines and a few static people along with some animated ones. The only exception to this is my smaller transit-oriented Gloucester route where there's a consistent stream of tram cars making their route.
How far from the track do scenery objects have to be fully 3D?
Far enough into the background to fill in the details, perhaps a baseboard at the most. After that it can be a combination of high resolution textured low resolution objects and some 3D. It's all about what can be seen versus what we need. Do we really need a fully populated farm complete with an animated tractor 6 baseboards from the tracks around the corner on the other side of a hill?
Does every switch, lever and dial, anywhere, have to be fully functional?
No. If they're not needed, why go through the trouble of animating them or making them functional. This is not only more work, but also more overhead for the simulator to track and operate for us.