What the Rules Say
See the "Vision and Light" section of the PHB (p. 183), or here in the basic rules:
A given area might be lightly or heavily obscured. [...]
A heavily obscured area—such as darkness, opaque fog, or dense foliage—blocks vision entirely. A creature in a heavily obscured area effectively suffers from the blinded condition (see appendix A).
Darkness creates a heavily obscured area. Characters face darkness outdoors at night (even most moonlit nights), within the confines of an unlit dungeon or a subterranean vault, or in an area of magical darkness.
So, the question hinges on what the phrase "blocks vision entirely" means. Does it mean that you cannot see things that are in the area of darkness or does it mean that plus you cannot see through the area of darkness.
Our current physical model is that vision is a process caused when light that travels through space strikes our eye and causes our visual neurons to fire. This is not what we have always believed; before the scientific era, it was commonly understood to be something that the eye generated - who is to say that this is not the way it works in a magical universe?
Our current scientific concept suggests the first interpretation but the magical interpretation is consistent with the second; it is, in the end, up to the DM.
Using the first interpretation:
- There is no limit to the distance the light can be seen.
- The human can see the dwarf, the dwarf cannot see the human.
- The human never counts as blinded, the rules say effectively blinded. He is not effectively blinded when interacting with the dwarf; he is effectively blinded when interacting with his immediate environment. IMO the use of the phrase effectively blinded is counter-intuitive, it would be better to say that the people and objects in a heavily obscured area are effectively invisible - this creates the same game effect without the confusion.
Using the second interpretation:
- The light cannot be seen.
- Neither can see each other.
- The human is effectively blinded.
What happens in the real world
You have a total visual range of 0.000001 to 100,000,000 candellas per square metre - a range of 1014.
However, at any given time your effective contrast range is about 100:1 - the brightest thing in your field of view that you can distinguish can be 100 times brighter than the darkest thing that you can distinguish; anything darker than this is too dark to see, anything brighter than this is too bright to see.
Where your current contrast range sits in relation to your absolute range depends on physical (your pupil changing size) and chemical (changes in the retina) responses to the total amount of light hitting your eye.
If you are close enough to the aforementioned dwarf/torch combo that the illuminated region is a significant part of your field of view then you will be adapted to see the things that are illuminated, everything else will be "too dark" to distinguish (200 feet is well within this area). If you are far enough away that it is an insignificant part of your field of view then you will be adapted to the darkness; you will be able to see the illuminated area as a bright spot but not be able to distinguish the things within it as they are "too bright".
For all practical purposes,the light of a torch on a dark night can be seen literally for miles. The transmissivity of the earth's atmosphere at sea level is between 0.2 and 0.6 per nautical mile (about 6,076 feet) for visible light (it is wavelength dependant). The horizon at sea level is about 2 nautical miles away so you will still be getting about 16% of the torchlight at that distance.
What happens in a magical world
Anything ... it's magic.