They are performing a fairy tale, yes. We, as the audience, are supposed to have 'come across' their sidewalk show that they are about to perform. They use what is around them and morph it into what it needs to be; like afore mentioned and stated in the show "every fairy tale holds a little truth." Paradice & Brooklyn are, at their 'sing-off' dressed beautifully; however, the street performers only have trash bags and caution tape, duct tape, and the like.
What makes it work for me as an audience member is they take it, acknowledge it ("Trash never looked so good..." etc), causing use to accept it, and the show moves forward. I think it was incredibly smart and I can't picture it done any other way and still be successful.
I enjoy almost everything about this show. Sure, it gets a little hokey every now and then, but it still has many great qualities.
Of course, I know others disagree with me on this and that's fine. I'm allowed to like what I want
whatever and ever amen - ben folds five