Can someone elaborate on how alignment works in this game?
What are its mechanical effects, and how is it awarded? Does it seem fair? Any cases where you felt you were falsely awarded good/evil points by a game developer who did not share your morals?

It tracks pretty much everything, from your choices in conversations to quest you choose to finish. And the slider always moves ever so little, so you can't quite tell what have you been awarded. The exact workings of the slider are only known to the devs, and last time I checked they were fairly cryptic about it.

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It said somewhere that being good makes you more successful with permitted magic, while being evil makes you more successful with forbidden magic.

Yea, it says that in the manual. But one of the permitted good spells is inquisitorial magic (according to the manual that is... in the character selection it is red like some of the forbidden schools)

This raises the question of "what is good". The video game is going to judge your every action as "good" or "evil" and I am curious what kind of acts are what.

I also wonder where Inquisitorial magic goes...
Anyway, I have no intention of ever playing as an evil character, but does it mean that people will cross themselves at your sight (or at least be afraid of you), meaning you have more restricted dialog options? If so, and you don't rely on magic much, then it's only worth playing as a nice guy.