I was in the town of Dawnstar when a dragon began flying around and not a single NPC reacted in anyway to it. The town guards continued their patrols, the other villagers continued to do their work as normal. When the dragon finally landed, just to the outside the town, none of the town's guards reacted in any way to it. After I killed it then a bunch of villagers run over and reacted to my character absorbing the dragon's soul.

Is this a glitch or an oversight, and have any one else had this happen to them too?

Hmm, something similar. I arrived at a settlement and a dragon came out of no where and started circling the village, but only half the NPC's drew there weapons. The other half of the NPC's just kept walking past me each telling me I looked sick.