For more than two decades, the characters of Seth MacFarlane's Family Guy have put themselves through increasingly absurd situations. Whether it's epic chicken fights or the Petercopter, the Griffins have gone through situations that would be extremely consequential in real life. However, in the world of the show, they can get away with just about everything and be fine in the next episode. A Reddit fan theory suggests the reason why they can do this is because the world of Family Guy takes place inside Peter Griffin's head.
It's all in Peter's head because he is trying to cope with the tragedies of his reality. In the real world, his kids are not like they are in his fantasy. For instance, Meg is a beautiful teenager and the most popular girl in high school. Also, Chris has an intellectual disability because he didn't get enough oxygen when he was born.
As opposed to the animosity the two have shown each other in the cartoon, Meg is caring of her brother. She even takes him to a party with her, but Meg drinks too much. Meanwhile, Chris has a panic attack. To get her brother out of there, Meg drive them home while intoxicated, leading to a fatal car crash and killing the both of them. Peter's wife, Lois, is devastated by the loss of her two children, so she commits suicide while pregnant with Stewie.
With the loss of his entire family, Peter loses his mind and creates a world in his head where they're all alive. This explains why Meg is less popular and bullied all the time, since Peter resents her after her drunk driving caused this tragic chain of events. It also explains the uncharacteristic, minor moments where Peter shows her compassion, offering an inkling into what their life was like before everyone died.
As for Stewie, Peter never had the chance to meet his son, so he imagines him as ridiculously intelligent and full of potential. Meanwhile, Stewie's desire to kill Lois is a reflection of Peter's anger towards her for taking her life along with their unborn son's.
Peter's childish behavior and stupidity is also manufactured in his fantasy. In the real world, he is smart, but he sees himself as an idiot because he believes he failed as a father and husband. His intelligence is not gone entirely, but it is channeled into the family dog, Brian.
Peter's best friends, Cleveland and Quagmire, are similar to their real selves, and they often visit him the hospital he's now residing in. They also tell him about the neighbor he never met, Joe. Since Joe is described as a strong and heroic family man, Peter puts him into his fantasy to represent the father and husband he wishes he could've been.
It's also during these visits, that Cleveland, who indulged in Peter's fantasy, starts to feel himself lose touch with reality, so he takes a break for some time. This prompts Peter to create The Cleveland Show in his head.
Finally, the show features Peter putting himself and his family through absurd situations, and these are often reflections of his real life guilt. However, unlike the real world, things always work out for the best for his family in his fantasy. Since they never got a happy ending in reality, he tries to make one in his mind.