For 42nd street, which is where your model is re-creating--you would have 'holding lights' which operate the opposite of the way described--turned on to hold a train in the station, and are turned off when the train is allowed to proceed.
At terminals, yes, I believe such lights are turned on (usually accompanied by a gong) to signal crews of clearance to depart. For both installations, I've never seen them recessed into any sort of enclosure--most of each bulb is visible (the individual bulbs may be shielded by plastic domes, such that standard sized LED's would make for a good replica either way.
---PCJ
