I'm from the mid-western United States, and we use both #1 and #3, but would probably use #1 most of the time.
In this context, we probably would use the word "everybody" to indicate "all people". I would very seldom use "all people" in a sentence like this, and would just use "everybody".
"In a small town everybody knows each other and everybody's business." This would indicate that since towns are small and there are few people, that everybody is acquainted with each other and knows what each person is doing in their life.