Passing list as a parameter: player vs the world - performance

Question

I'm creating a top-down 2D game.
Classes in question are Level and Entity.
In Level I have a Map, but let's just think of that class as a list of items like walls and other stuff you can imagine will have a body, which is actually a XNA's Rectangle.
Now, in Level's Update function, I'll be putting Entity's function that will resolve all collisions (walls, pickups, other entities, traps, etc), and I am questioning the best way of letting each Entity know what's around him. By doing that I want to achieve the freedom of creating different Entityes such as different players, enemies, bosses... Goal is a good parent class for everything that should feel alive to the player playing the game.
So, I want to get a good performance for this function (that'll resolve collisions), because I plan on making maps that'll have around 1000 different items and many entities, and can't decide how to go about it.
The structure is something like this: Level has a list of items (walls, pickups, traps...) and a list of entities (players, enemies, bosses, pets, mounts, whatever...), and in each update of level I loop trough entities and do Update for each.
Question Do I:
1) send whole list of items to each entity('s update method) and calculate distances from each item and resolve collision
2) calculate closest items to the entity in level's update method and then send smaller list of items to the entity, which will then resolve collision
3) (this I just thought of) pass list of XNA's Rectangles and type of item (that could mean I must make a new class or new function for map class that will return 2 lists: rectangles and item types)
4) pass the whole map, but in a matix (because map will be a grid, not items nor player's rectangles will rotate) of integers that'll have something like "1 for wall, 0 for nothing, 2 for trap, 3 for health-pack, etc). But this will resolve only the map, because other entities won't all be in grid coordinates (wall's positions will be like 32x32, 0x64, etc, and all will be 32x32, but entities won't. They'll be 32x16, and their position may vary. That also crossed my mind just now.
Note that both entities and items will most likely have much more than Rectangle for body. There will be textures, animations, and other basic types of variables for different purpose, and most of them won't be needed for entities collision resolution with that item. When colliding with a wall, entity won't need that items image to resolve collision, but it will need items (lets say) X value if that item is a healt potion.
How would you resolve this so the code is efficient, or how did you resolve this in your game?
I am looking for simpicity and efficiency, and that's what I will be looking for in your answer.

Answer 1

I haven't tested this code at all, so if it doesn't work, thats why.
Given that Entity is a struct with the following code,
struct Entity{
Rectangle pos;
Texture2D tex;
bool hasAgency;
public Entity(Rectangle pos, Texture2D tex, bool hasAgency){
this.pos = pos;
this.tex = tex;
this.hasAgency = hasAgency;
}
}
then this should work.
List<Entity> entityList = new List<Entity>//your entities are here
for(int testIndex=0; testIndex<entityList.Count; testIndex++){
for(int entityBeingTested = 0; entityBeingTested<entityList.Count; entityBeingTested++){
if(testIndex!=entityBeingTested && entityList[testIndex].hasAgency)
{
if(entityList[testIndex].pos.Intersects(entityList[entityBeingTested.pos]))
//hit logic here
}
}
}