Board Thread:Lore Discussion/@comment-85.74.137.231-20130605091958/@comment-11425537-20130701084329

As Paarthy(Paarthurnax) put it;

"I am as Akatosh made me, as are you."

Simply put, it is how Akatosh made them, and since it's not just their blood that is part dragon, one could surmise that Akatosh just grabbed some dragon's soul and stuffed it into a Mer, a Kajhit, an Argonian, Imperial, or Breton.

That and, constant inbreeding usually leads to both physical and mental insufficencies. There's more than one dragon, as is obvious by all of the named ones - one could also surmise that someone's ancestor boned a dragon.