Overselling is a big trend in the web-hosting world at the moment. It's an easy way to get more out of your servers than normally is possible. The basic idea of overselling is that the majority of your clients are only going to use a fraction of the resources allocated to them so there's going to be a lot of wasted bandwidth and space. Overselling involves taking a gamble and selling more than you can handle assuming that the unused resources will cover it.
Overselling however, keeps prices at low rates. If there would be no overselling, few of us would have phones and those who would have, would pay some hefty fees to use them.
Even the bandwidth providers oversell. My point so far is that overselling is not necessarily a good thing, but it's not necessarily bad either. The only problem is that is has to be done right, with careful planning. Tough regulations govern some of the industries where overselling is the de facto rule, but that's not the case with hosts. Some think this is a good thing, some don't.
The advantage of overselling for the host is that they make more money off each server than they otherwise normally would be able to. The advantage for the client is that this extra revenue is usually transferred on (at least in theory) by cheaper hosting packages with more features. The problem is that these features are often 'smoke and mirrors'. A few users would be able to use their entire allotment without any trouble, but if every single client were to build their website up to maximum capacity the host wouldn't be able to handle the sudden increase in demand without adding extra hard drives, buying more bandwidth, or perhaps even another server. This would most likely lead to a fair amount of downtime.
Unlimited bandwidth claims get a lot of press, but the real danger lurks in the practice of overselling bandwidth. Like the man behind the curtain, overselling is the cause of real problems but is frequently overlooked because of the attention devoted to the front man.
Overselling is the practice of selling your customers more bandwidth than you actually have. It's the same practice airlines use when booking seats, though if you were to extend the analogy it would result in airplanes that crashed because they were to full.