ARM Instruction size vs Instruction encoding
From my point of view they are both "interconnected". The old style CPU instruction sets were all the same size, now with this Thumb mode the instruction size is variable, where some of the bits (encoding) of the instruction determines also its size . It is explained in the link you provided: the CPU fetches the first half (16bit) of the instruction, then it branches wheather it is 32bit instruction it fetches the second half (additional 16bits) of it, if it's only 16bit instruction it executes it without fetching the second half.

With this kind of instructions also the programming memory is smaller compared to fixed size of instructions.