In his piece on the effects of music in film, "Corporeality, Musical Heartbeats and Cinematic Emotion", Ben Winters explains that music can illicit emotion in the audience by replicating sounds we recognise our own bodies make. For example, heartbeat sounds are used to create tension and fear in Alien. The following scene from The Truman Show has a soundtrack by Phillip Glass which features slow, drawn string notes which effectively emulate weeping or moping sounds - bringing about a subconscious physiological memory in the audience.
Another thing Winters writes about is the diegisis of the music - where it is thought to be coming from. Sometimes it emanates from a character, like the heartbeat score emanating from the alien itself in Alien. Most often soundtracks are intra-diegetic, which means we imagine the music is coming from a kind of omniscient narrator. But in this scene from The Truman Show we literally see where the music is originating. They're playing it right there in front of us in order to manipulate us, and yet still it works. Even the characters in the studio in this scene, the ones creating the drama, they're clearly getting emotionally affected. Therefore I'd argue that this scene demonstrates that the source of music doesn't have to be mysterious to work, and intra-diegesis is somewhat irrelevant
There are two more brief points Winters writes about that I think are confirmed by this scene. First is the the mimetic hypothesis: the idea that we experience emotion by emulating what we see or hear on screen. This kinda goes back to the wailing strings. We hear something like wailing and on some level we understand how that feels, physically. And after Truman hugs his father, just about every other character in this scene starts hugging the closest person to them - mimicking Truman in order to successfully and totally empathise with his emotion.
But then all this emotion that is felt by both us as the audience and the characters watching Truman in this scene is only what Winters calls 'cinematic-emotion'. It's cognitive. You feel it, but you don't believe it. This is confirmed by that fact that, just as in a horror film you can experience very real fear and not get up and call the police, Truman's audience and creators feel his emotions - longing, sadness - but do nothing to help him. They don't believe in him as a real person, even though he is.
These are a few of the ways in which I believe this scene both creates cinematic drama and demonstrates some of the genre's inner-workings.
Winters, Ben. "Corporeality, Musical Heartbeats and Cinematic Emotion". Vol2, Issue 1. Spring 2006. p. 3-25.