Because instances are hosted by individual hobbyist and not a company that makes profit, the amount of data that an individual instance can store and process is much more limited by their hardware. Spreading the load across numerous hosters allows for a higher capacity of data storage and therefore total lemmy users. Because of this i encourage you to use more niche instances if they suit you.

As for why one would choose a particular instance over another; you'll find the each lemmy instance typically has its own social ecosystem and political consensus, because of this certain users will gravitate to the one that suits them best. For instance, lemmy.blahaj.zone is very LGBT heavy with an emphasis on the T, lemmy.world is quite liberal, lemmy.ml is typically socialist, hexbear.net is communist, and lemmy.dbzer0.com is pirate. While many of these are federated with eachother you will often notice an emphasis on certain subjects on an instance by instance basis