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This is a "Wild Mass Guess" entry, where we pull out all the sanity stops on theorizing. The regular entry on this topic is elsewhere. Please see this programme note.
Burnout
Paradise City is Pacific City from Crackdown before it separated from the mainland, as well as Oceania from Extreme-G 3 and Big Blue from F-Zero GX
Think about it for a second. Paradise City is overrun with street racers. Law enforcement is non-existent. Criminals of all types are likely using the racers to take control of the streets. The three urban districts will eventually become the main districts of Pacific City: Harbor Town will become The Den, run by The Volk; Palm Bay Heights will become La Mugre, home to Los Muertos; and downtown will become The Corridor, run by the Shai-Gen Corporation. Criterion, the developers of the Burnout series neglects to show us the dark side of Paradise. Crime will take over, and only The Agency will be able to set things right. The other two districts of Paradise City will remain attached to the mainland, leaving only the urban sectors to become Pacific City. Some time a few hundred years later, it's been carried so far out to sea that the mainland is no longer visible. The city is then converted into a tourist attraction, becoming Oceania, as seen in Extreme-G 3. A couple hundred years after that, it will be converted into an ocean based industrial complex, becoming Big Blue, as seen in F-Zero GX.
  • But then, what about Big Surf Island? What happens to it, hm?
The Events in Paradise City aren't races, but gang activity carried out by the racers
As a corollary to the above, every event in Paradise City could be seen as a gang activity. Marked Man is smuggling, whether of goods like illicit drugs and arms, or of personnel, like delivering them to extort, racketeer or rob, or to retrieve from a robbery gone bad. Races are competitions to get personnel to a location first to extort, racketeer or rob. Road Rages are turf wars, establishing a gang's control of territory. Burning Routes are gangs testing racers to see if they're any good on the gang's smuggling routes. Stunt Runs are likely just racers showing off their stunt driving skill, but the gangs likely watch these to find the best drivers to carry their goods.
In line with the above, Atomica is the leader me the whole thing.
Go figure.
Burnout Paradise and SSX 3 are in the same universe.
The mountain seen in SSX 3 is White Mountain, set in the far north west of Paradise City. The events of SSX 3 take place on the other side of the mountain, though, thus seperating the snowboarding madness on the mountain from the vehicular chaos in the city. If Paradise keeps growing though, as in Big Surf Island, the two just might collide, and snowboarders might wind up dodging traffic down the mountain, while Burnout drivers try to mow them down. There's an idea for a game...mwahaha.
  • DJ Atomika's presence and a reference to "the SSX snowboarders" by DJ Stryker in Takedown (they apparently stay at the Hotel Grand in Takedown's incarnation of Europe) mean this is far more than likely.
Paradise City is actually a gigantic crash test environment.
The city was built by an association of car manufacturers as a gigantic lab to test prototypes. The humans control the cars at a distance, and the manufacturers let the general public play with them for a fee. A competitive system of licences and rewards encourages peoples to be reckless, facilitating the performance and security tests. The town is probably also used by architects, urbanists and the likes to study ways to improve traffic management.
  • Paradise City was the first example of such an environment. A second city began construction but was abandoned.... until a few TV execs found out about it. They started building it again as a location for an extreme reality/game show. And thus we have the game Split Second.
The cars in these games are Cars from Pixar's Cars
Think about it, there's nobody driving them. As far as we can tell, the whole world is made out of cars that drive themselves around. The ones participating are part of a Death Race-like suicide challenge being filmed for the amusement of the rest of the Cars world.
  • Then why do these cars look so much better?

Alternate to the above: Paradise City is a prison in the Cars world
You can drive around Paradise City all day, from Big Surf Island out to White Mountain, yet there are no roads that lead out of the area. The player cars are alpha prisoners, the ones that call the shots among the lesser inmates. The ingame activities can be explained through several prison events. Road Rage is a prison riot. Marked Man is an attempt at an assassination. Races are small scale brawls. Stunt Runs are prisoners showing off to intimidate rivals. Showtime is a one-inmate rampage. The two (initial) player police vehicles are still inmates; crooked cops who are serving their time behind bars. Non-PC police cars, and the police cars in the Cops n' Robbers DLC, are the actual guards, attempting to keep order in the prison. The Cops n' Robbers multiplayer game is the guards trying to keep contraband out of the inmate population.

As yet another alternative, all cars in Paradise City are Transformers
That explains why there's nobody driving them (they are robots in disguise), why they can rocket boost and regenerate their boost supply (they use energon-powered thrusters), and most of all, how they can regenerate themselves after they crash (they merely retransform to their originary shape).
  • To expand on this: the player is an Autobot, your opponents are Decepticons, and traffic is neutral Cybertronian refugees from Cybertron after it was destroy in Headmasters.

Crash drivers are suicide-bomber terrorists.
Cars primed to explode multiple times, either by manual activation or passing certain checkpoints (i.e. icons), all with the goal to cause as much damage as possible to fellow drivers in No One Could Survive That tier collisions, and keeping track of it all by how much fiscal harm it will cost society as a whole? Sure sounds like terrorist activity to me.

The franchise is set in the post-apocalyptic near-future.
Sentient satellite navigation systems have taken over the world and reduced humanity's population down to a few thousand resistance fighters. Some of the resistance fighters act as radio DJs, egging the vehicles to crash into each other. Others go out at night under cover of darkness and set up flimsy ramps to make the streets more dangerous and crash-prone. Still braver warriors capture and disable the cars, then race against the machines, running them off the road while trying to survive themselves. The sat-navs, however, still respond almost Pavlovian way to human temptations such as fame and money, which the humans take advantage of to distract the machines while trying desperately to find a way to finish them off once and for all.

BullyWMG/Video GamesCall of Cthulhu: Dark Corners of the Earth

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