Well, firstly, actual dungeons are prisons typically found in castles. Since cities often build up around castles, it is quite normal for real dungeons to exist in real cities.SajuukKhar said:And it simply doesn't make sense for a dungeon to be located under a city, that's idiotic except in the most extreme of circumstances, such as Markarth being built inside the surface area or a larger underground Dwemer ruin. No one is dumb enough to go "lets build a city over a giant ruin full of draugr!". That's almost as bad a RPG cliche as NPcs telling you thier entire life story at the slightest provication, instead of just telling you to go away like Skyrim's NPCs do.
As for why anyone would build a city on top of a Dwemer ruin, probably because the site was a good place to build a city. Naturally defensible, access to a river/sea, fertile land etc. The Dwemer built a city there because it was a good place, then others built a city on its ruins because it was still a good place for a city. Consider that a lot of real world cities are built in earthquake zones. If real people are living in and building cities in places where eventual destruction is almost inevitable, why wouldn't fictional characters build on Dwemer ruins when the Dwemer will probably never come back?