Miniature Effect with a Lens Blur
When you are satisfied, select the RGB channel to activate the background layer with your image on it, and then find the lens blur filter. (Filter>Blur>Lens Blur) Any blur will work to some extent, but the lens blur filter is designed to mimic the optics of a camera, and is perfect for our optical illusion. 
All I worry about is the depth map and iris radius settings.

Lens Blur:Depth Map
The depth map should be set to the gradient filled alpha channel you created before (Alpha 1). Otherwise everything will be blurry. If you did a perfect job you can leave the focal distance setting to zero. Play with it a little to extend the effect, even inverting it as you increase the setting. I used 10 in this example to better include the bus and gas station.

Lens Blur:Iris
The iris radius controls the amount of blur, like changing the f-stop on your camera. This is totally a personal call. I like settings in the 20–60 range for out of focus, yet recognizable results. The other settings in the Iris section change the shape of the effect. I haven’t found them to be of much use here.

Lens Blur:Other Controls
The specular highlights can be used to brighten whites, even creating lens flare effects if you lower the threshold. I bumped the brightness up to 30, to increase the “plastic under fluorescent lights” effect. The noise section simulates film grain, and ruins the effect in my opinion. Use sparingly, if appropriate. When you like what you see click OK. You can now make the alpha channel not visible (or even delete it if you choose) and review your results.

4. Crop to Finish

In this example I found I liked a subsection best. Here is the selection of the final crop.

I was able to turn a rather dull day into a fun shooting experience, and generated several pictures of our model town:

For a change of scenery, here is a snap of Chaco Canyon, in New Mexico. The walls look like they are made of styrofoam.

Resources:

You can go here for information, mostly optical tilt-shift, and lots of inspiring galleries.

Flickr is also a good source for inspiration There is a pool for optical images, plus one for us fakers

Bittergirls is a digital miniature phenomenon.They have lots of high quality fake miniature images of varied subjects in their photoblog.