I don't have a problem with the population per say, but I do have a problem with creating 16 square miles of real estate and calling it a nation.
They could have made one huge city that was from TES lore in a province, then made other small cities around it within the 16 square miles and make a game out of it.
I would like to know, then, how would you be able to play in a hypothetical future game where technology was developed enough to represent a virtual nation as big as a small country in real life. Something like, say, 8,000 sq miles. Since this seems to be what you're hoping for.
An area that vast would be completely impractical. And I guess the land of Skyrim is supposed to be even bigger than that. How many days would it take to travel from one place to another? How many hours to just visit one building? Asking for something that realistic is absurd.
Although maybe you just meant that it would be better to have a single large city, in which case, to make it large enough to be realistic, you would run into similar problems. Not to mention that we would be talking about a completely different game. Going into adventures to raid ancient caves and temples? Forget about it, we are in the city. Climb the Seven Thousand Steps to meet the Greybeards? Not a chance, the mountain alone would be as big as the city or bigger. Having the sense that you embark on a journey through the wilderness, unaware of the dangers that await behind a mountain range? That's out of the question as well. The whole narrative would have to be confined to the city, calling for a radically different take and experience. If that's the game you want, there's nothing wrong with it, but suggesting that Skyrim could've been that doesn't make any sense to me.
Anyway, I don't understand why some people have so much trouble believing that a map like Skyrim's, which is pretty damn big if you ask me, can be an acceptable fictional representation of a large province. I grew up playing Zelda: Ocarina of Time and thinking that the Hyrule field was as big as Yellowstone Park. It's what the game implied, and even though it wasn't literally right,
it felt right. And that is all that matters.