Hi resolution is good. The only real disadvantage is that it can limit the top speed because the encoder inputs have a max count rate. KFLOP encoder inputs are specified at 1MHz. So you should keep your speed under 12ips (700ipm).
It doesn't really have any effect on the Servo calculations.
It is up to you to decide what is a reasonable following error for your machine and requirements. Just divide the following error by your resolution to determine the distance. So for example a following error of 83 encoder counts at a resolution of 83,000 counts per inch would correspond to a following error of 0.001 inches. Also realize that when doing a high speed rapid you probably don't care what the errors are. So better to check what your errors are when at useable cutting speeds.