What happens when camera setting uses fewer MP than possible?
I am thinking of getting a new camera, but I am looking for one thing to be clarified regarding the "more is better" megapixel myth. I keep reading about how cramming more and more megapixels onto very small sensors can actually hurt the photo quality because all of the MP on the sensor are crammed into such a tight space and, as a result, have reduced light sensitivity, create increased chance of spillover, etc.
What I am unclear on, though, is how reducing the settings on the camera would affect this phenomenon. For example, if I have a 14 MP camera and use the camera settings to only shoot photos in 8 MP, how does the camera actually do this? The sensor still has the same 14 MP, so would this even help the pixels "perform better"? How does this actually work? Do 6 of the MP become inactive. Do neighboring pixels merge together into fewer, larger pixels. Does it have anything to do with the sensor, or just how the software digitizes the info from the sensor?
I would like to have a camera with as many MP as possible just in case I want to do any severe cropping. However, if there are "too many" MP and shooting with fewer than the camera is capable of won't solve the problem, then there is no sense in getting a higher MP camera. I'm not sure if my question is clear, but I guess I will find out when the answers start coming in.