The government, interestingly enough, does have some dictatorial traits: They want to appear as the ones in charge, and the prevailing doctrine is that while life in the city is bad, everywhere else is far worse (though people aren't allowed to leave to check) and the city is surrounded by enemies (that no one ever saw) and they're the only ones keeping said enemies out of the city.
Similarly, the Institute isn't interested in policing the city (read: spending resources on something they have no return of investment in) but they do have the ability to enact a fair amount of force once something does involve itself in their business. In that, they are no different than Haven which also has its own security guards and enforcers and limited community infrastructure for its members.
Which leaves the city's general population in a position where laws exist, but there isn't really anyone to enforce them. Rape is illegal, murder is illegal, underage drinking is illegal, but no one ever does anything about these things because the government has its hands full paying clerks, teachers and heavily armed border guards and the organizations in power won't move if there's no clear benefit for them in doing so. If public order was their main concern the Institute could wipe out Haven in a couple of hours, but they don't because that would upset the balance of power in the city -- there's a reason they sent the MC to investigate, who isn't overtly connected to the Institute, and even then after having her appearance reworked: They simply do not want to get in a territorial dispute with Haven because it would not be advantageous to them. Even the Brothel Raid from the Slave (soft) bad end was only to retrieve their 'property' (Sammy's body), not to remove the brothel with all its implied forced prostitution from (the outskirts of) the city.
That's what the Institute 'made' Sammy for, a means to increase their sphere of influence without openly stepping on anyone's toes. Sammy is a trial run to see if it's viable to have more agents than just her in the future, that's likely why they put some rando kid in the new body. They paint themselves as the good guys while she helps them work out the kinks in the system, but in the end all she is to them is the asset that is her body. Sammy the person means nothing to them.