Salon des Fees

Two answers - a) the economics of those small audience sizes make it harder to break even, which is hard enough in theater most of the time and b) as you said, too many people want to be entirely passive in their entertainment, so it can be difficult to get people to interact. You either need to get exactly the right people or you need to constantly cajole and reassure them that it isn't only allowed, it's desired. (Or, in something which can be done in larger groups, you can also seed people in the 'audience' to demonstrate that no, really, interacting is the point, but that's hard to do in small groups.)