Ignoring the fact that this isn't how the rule works, it still doesn't make sense.
What you're saying, is that, except for people with Knowledge: Arcana, people in the D&D world don't know that Red Dragons breathe fire. Knowledge skills can't be used untrained. Furthermore, a DC17 knowledge check isn't that easy to make...someone of average intelligence with 5 ranks in the skill will miss the check more than half of the time.
Knowing that a Red Dragon breathes fire should be like knowing that tigers have sharp claws and eat people. It should be automatic.
What is missing in the rules, as was stated earlier, is information on how well known monsters are. It makes sense to require knowledge checks for the more esoteric monsters, but the iconic ones should be well known, in my opinion.
Ken