It's cheaper to waste Linode resources

Linodes are grouped on hosts according to the plan size. There is only so much "extra" disk space to be used on each host.

The higher pricing of "extra" disk space reflects the fact that it is indeed more expensive for Linode to give you more space on your existing host than it would be for them to give you space on a host that was built to accommodate larger plans.

Maybe that's their way of saying they'd rather have you just upgrade a size and call it a day?

Besides, you'll make people happy since you'll be on a 768 server with other 768 linodes, but not nearly as demanding, so your fellow 768s will like having you as a neighbor. Plus you'll have more RAM and CPU when under load since you're promised a bigger slice of the pie.

Upgrading to a bigger plan is not a waste. Linode are already pre-prepared for it - at any one time they have probably dozens of server slots of each account size waiting for new customers or people upgrading. They don't have to do anything as it's all automated, so there's virtually no labor cost.

Adding more storage space to a small Linode is, I am guessing, more labor intensive/less cost effective for them.

Your interpretation of what is a waste may be completely different to the way Linode experience it.