My thoughts on this and they are based on cognitive behavioural therapy, I will preface this by saying I'm not all that good or knowledgeable at df, but I will try some logic:
I think the idea that 'Good' and 'Evil' are descriptors provided by the dwarfs is disproven because 'Good' lands are full of Elves and Dwarfs are enemies thus living there might be undesirable, likewise 'Evil' lands can have very good materials, so they be desirable (if your brave/greedy enough).
So, lets start with an initial assumption, that perhaps 'Good' or 'Evil' are innate properties of the lands that encourages a certain types of behaviour -- because they are described as such in the biome. If this is not being enforced visibly (e.g. gods are not manifesting themselves physically and telling people what to do) then this behaviour must be enforced by the gods through an unknown mechanism (i.e. a game mechanic). Now if we also accept the thought precedes the deed - that a dwarf, a goblin or any other living (or unliving?) creature has to mentally conceive of an act before actually acting on it, and ones behaviour is the collective sum of ones actions, then it become clear that in these 'Good' or 'Evil' lands the inhabitants are subject to a certain cognitive therapy (via game mechanics).
So, it follows we can deduce the cognitive therapy mechanics from the behaviour of their inhabitants for two reasons:
- Over time the cumulative effect of the therapy would cause a change in behaviour
- If creatures have the ability to choose where they live and creatures enjoy having thoughts in tune their nature, then those creatures amenable to these cognitive changes would thrive and those not amenable would not.
If a 'Good' area is populated predominantly by elves, then there must be a mechanic enforcing elven behaviour. Thoughts about killing are unhappy thoughts. Thoughts involving killing animals and cutting down trees would be unhappy thoughts.
This might explain why dwarfs don't start in Good areas, because Dwarfs are industrious by nature and resent being conditioned to act against their nature. And it would also explain why evil creatures don't tend to live in good areas, because a monster might be disturbed by unhappy thoughts when acting according to their nature.
If an 'Evil' area is populated by creatures that exist predominately to kill, then the mechanism there encourages that behaviour by associating it with happy thoughts (which would be disturbing for dwarfs, elves and humans but not for monsters).
One can also assume that Neutral areas have no overall thought influencing mechanism by definition.
I'll haven't talked about actual effects in the game, this can wait I think.