Does the narrator live in Omelas? What do we know about the narrator's society?
The narrator is not a resident of Omelas. While the narrator is unaware of societies outside Omelas, they are also unaware of certain aspects of Omelas society -- asking the reader to imagine or choose certain details as they describe the community. The narrator also marks the citizens as different than them with the way they're described.
The narrator calls the citizens "they" rather than "we," saying "How describe the citizens of Omelas? They were not simple folk, you see, though they were happy." If the narrator was one of the citizens, they would surely say "We were not simple folk, you see, though we were happy." While it's possible that the narrator could choose this perspective to sound a certain way, there are other clues that indicate they aren't a citizen of Omelas.
The narrator also says that they don't know the rules of "their" society in Omelas -- indicating that the narrator isn't a member of that society. They say, "I do not know the rules and laws of their society, but I suspect that they were singularly few." Having a suspicion, rather than having concrete knowledge, is a sign that the narrator isn't from Omelas.
Another sign that the narrator isn't from Omelas is how they ask the reader to fill in details of the society about which they aren't sure. For example:
But even granted trains, I fear that Omelas so far strikes some of you as goody-goody. Smiles, bells, parades, horses, bleh. If so, please add an orgy. If an orgy would help, don't hesitate.
The narrator invites the reader to fill in the blanks of Omelas. The reader becomes a part of the story, imagining the utopian, happy society exactly as they choose. If the narrator was a member of Omelas, they wouldn't leave blanks for the reader to fill in. They'd be able to give the whole story.
Ultimately, we cannot know anything about the narrator's society. The narrator only speaks of Omelas and the places where people go when they leave. The narrator knows only a limited amount about Omelas and almost nothing about the other places to which people go. All they can say is:
The place they go towards is a place even less imaginable to most of us than the city of happiness. I cannot describe it at all. It is possible that it does not exist. But they seem to know where they are going, the ones who walk away from Omelas.
If anything, it seems like the narrator is making themselves more like the reader. When they say "most of us," and then admit an inability to describe it, they place themselves on the side of someone outside Omelas, outside the places to which those who leave go. There is no way, in the end, to know what society the narrator belongs or what that society values.
Because of the subjective use of first person point of view, the narrator of this story is an unreliable narrator. Also, this narrator is unreliable because he/she invites the reader to participate in the description of Omelas. And, apparently, from the switch to third person point of view, the narrator is not a resident of Omelas.
From the description of Omelas by the narrator, there is a certain ambivalence that comes through: "How is one to tell about joy? How describe the citizens of Omelas?" The happiness has an air of unreality to it, for it has been fashioned by man, certainly an imperfect work himself. Further, the problem of describing happiness, it seems, is that its antithesis has been eliminated: pain and sorrow, and one can only truly know happiness after having experienced sorrow. Thus, Omelas seems but a fairy tale. And, here is where the narrator most exhibits his unreliability as he suggests the reader him/herself decide about Omelas:
Perhaps it would be best if you imagined it as your own fancy bids, assuming it will rise to the occasion, for certainly I cannot suit you all.
Here, also, is the point at which the concept of empiricism enters as the world and human experience can never be given an entirely objective analysis. For, with the differences in human beings, each mind that observes something will affect the outcome of an empirical approach to truth. Indeed, it is this "pragmatic theory of truth" proposed by William James that is at the heart of LeGuin's narrative.
Because of James's beliefs being "those that prove useful to the believer," the narrator switches later in the story to the third person point of view, and the discussion of Omelas as a utopian society becomes one that the reader and the "believer" must decide. This is why some residents have tears that dry "at the bitter injustice" of the degraded and imbecilic child when they comprehend the "terrible justice of reality" [pragmatism] and they accept it." Others cannot accept such a concept and, therefore, leave Omelas.