By its nature, the Web is a series of interlinked sites. People originally found sites by following links long before search engines based their (algorithms) on data mining those same links. Webmasters created resource lists and link directories to help others, saving people time.
Then PageRank, a graduate student search engine project that ranked pages based on link analysis, emerged from Stanford University. Now, people don't have to visit dozens, or even hundreds, of sites reviewing links because search engines do it for us. Even better, they analyze linking patterns to deliver the most relevant sites first – at least in theory!
By its nature, a search engine looks for sites that are helpful to its end users. If the engine is ranking sites that aren't useful to people, its user base will shrink. It's in a search engine's best interest to find and rank the most useful sites first.
With that in mind, when a search engine discovers a page pointing users in the direction of more useful information, that page will be given more credit. Ask yourself what's more useful: information that cites other government, education, and medical sites on a particular disease, or a page of copy describing the disease without referencing any authority sites? Not even a citation. That answer is a no-brainer.
Keep in mind that algorithms are designed by scientists, who've spent years researching at universities. The act of citing and referencing sources is second nature to them – they know how important this is for credibility.
Yes, search engines need to make improvements to deliver more relevant and accurate results. Just look at how often Wikipedia ranks in the top 10 in Google for various health problems. The average worried mother whose kid wakes up screaming with an ear infection in the middle of the night probably doesn't realize that any fool can edit that page and change the correct information.
Benefits of Linking Out
Search engines and people don't like dead end sites. Let's explore the previous question from a link perspective. What type of page do you think has a greater chance of getting numerous links and bookmarks: a single page article that doesn't cite sources, or a page that provides information, citations, and directs users to other sites?
First-rate bloggers and journalists have known the answer to this for years. Citing sources raises the bar on the content. Which would you trust more: a journalist who cites sources and provides readers with more sources of information, or one who simply states things with the expectation you'll believe them?
Search Engine Food
Search engines are always looking for new sites and pages. They depend on Webmasters to find and link to other relevant information. Give search engines what they want. Give them what they need. Make your sites useful and feed search engines high-quality links.
Sell clothing? Link to fashion history, style, and clothing care sites.
Sell software? Link to computer security, how-to, and computer maintenance sites.
Sell real estate? Link to city information, such as crime stats, neighborhoods, schools, and public transit.
So you want more links? Start linking out and become useful. Become that authority, hub, or reference site that currently outranks your site.
You've taken great care to tell search engines what your site is about in terms of content and title tags. Yet, many forget that engines also look at what sites you link to. You've described your house, now you must also describe the neighborhood. Search engines can tell a lot by the company you keep! Establish your site in the right neighborhoods by linking out to authority and resource sites.