I think the idea of the characters "living inside a dream" on a literal plot level is to do with how the universe of the show works. Remember that the Red Room was originally Cooper's dream, and that in FWWM Laura entered the Black Lodge in her dream. But at the same time, the Lodges are "real" places, other dimensions that can be accessed via physical portals in the waking world, as well as seeming to be the after-life. So it begs the question, if for example Cooper sleeps, goes to the Red Room, and at the same time Briggs is able to access the Red Room via a portal while he's awake, does he enter Cooper's dream and thus his mind? That would mean that the Lodges are all part of the collective conscious, and exists inside everyone's heads, and that we exist and live inside everyone else. We are therefore one unified whole in that sense. The "loop" that that idea creates actually calls to mind the number 8 / infinity symbol to me too.
The other meaning I think relates to the season's theme of death: death is all over it, from the huge violent body count, to the sicknesses of Truman and the Log Lady, to the numerous dedications at the end of each episode, and of course a final attempt to reverse a death. I think Judy in some sense represents death - something we try to avoid, make plans to stop, are scared to talk about, and ultimately can't be escaped. But as the Log Lady tells Hawk, "death is just a change," and life is just a dream.
Anthony this is a great point about the use of both the dream and a physical entry point and its link to collective conscientiousness access to the Red Room. Great post.
Good Cooper was way back in the lodge before Laura killed. Also Annie was killed and saw the red room and told Laura that Cooper is in the red room. So Cooper is always there with ARM and the ring. All is before Laura woke up and no ring in her hand. Laura is the dreamer.
Another great point. Maybe some kind of time travel scenario involved? Or an existence out of our normal time frame?
I like your theory but as a rule I am not focused on Who Is The Dreamer as I think this is not a clue but something from TM that Lynch likes so he added it. The diner observation is good though and almost got me. I'd be with you on the real owner of the house too except mention of Tremond and Chalfont which are lodge spirits so definitely not in our world. Thanks for your post!
Fire walk with