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.

The narrator does not live in Omelas but, instead, talks about it as an outsider watching from afar. For instance, the narrator speaks of the citizens of Omelas using the pronoun "they." If the narrator lived in Omelas, it would be logical to use "we."

In sentences that are side-by-side, the narrator uses the pronoun "they" to describe the residents of Omelas and then the pronoun "we," as if the "we" represents a different group:

They [the citizens of Omelas] were not simple folk, you see, though they were happy. But we do not say the words of cheer much any more.

The narrator also says,

I do not know the rules and laws of their society, but I suspect that they were singularly few.

This again indicates an outsider status: the narrator doesn't know the rules and laws, because they don't live there. Again, in the quote below, the narrator makes the "them and us" distinction:

They were not less complex than us.

As an outside observer, with nothing to gain from Omelas, the narrator can describe and comment clearly on the problems with this society in a way an insider would find far more difficult.

Omelas is described in the past tense, as if it no longer exists (if it ever really did in the mind of the narrator or was only created by the mind of the narrator). The narrator says that the Festival of Summer "came" to the town, the boats "sparkled" with flags, and processions "wound" to the north. The people "were" not simple, but they "were" happy: all past tense. However, the narrator occasionally switches into the present tense, as though to draw a contrast between the world of Omelas and the world of today. For example, she says,

But we do not say the words of cheer much any more. All smiles have become archaic.

The contrast between their time and our time, between them and the "we" the narrator discusses, and in which she seems to include herself, shows that the narrator does not live in Omelas. Further, the narrator says that the people of Omelas

were not less complex than us. The trouble is that we have a bad habit, encouraged by pedants and sophisticates, of considering happiness as something rather stupid.

Again, the narrator counts herself as one of "us" and not one of them, and so she must not live there.

I would have to say that the narrator does not live in Omelas, since Omelas is not meant to be understood as a literal city, in the same way the story is really not a story but a kind of thought experiment or philosophical problem. That is, the narrator seems to challenge the reader to imagine a city like Omelas, for the purpose of posing a moral question. When the narrator writes that "I do not know the rules and laws of their society, but I suspect that they were singularly few," or says later, after attempting to describe the city, "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," I think the point is not about whether the city is real, or whether the narrator lives in the city, but to provide an opportunity for the reader to imagine their own version of Omelas, one they can believe in. Once this notion is fixed in the reader's mind, Le Guin poses the problem of the child kept in misery. ("Do you believe? Do you accept the festival, the city, the joy? No? Then let me describe one more thing.") The problem she poses the reader is one of credibility -- how much evil does one need to include in the vision of Omelas to make it "believable" -- and of the imagination. The people who leave Omelas are the ones who choose to imagine a place where goodness can exist without evil and misery -- a place the narrator "cannot describe at all." Le Guin seems to challenge the reader to try to imagine a similar place.