How Does the Block Size Limit Affect Transaction Fee Volatility?

The block size limit, such as Bitcoin's effective limit, creates an artificial scarcity of block space. When transaction demand exceeds this fixed supply, it forces users to compete intensely by offering higher and higher fees to incentivize miners.

This high competition leads to significant volatility in transaction fees, especially during periods of high network activity. Increasing the block size limit is often proposed as a way to reduce this fee volatility.