Help me understand. The resources used in PoW is a function of the income acquired from mining. If we were to assume that the price remains stable, then why wouldn't a capacity increase result in an increase in the fees.
What do you mean by “capacity”? The capacity of the block? If we increase its size, the median fee will decrease. The miner will be able to accumulate more coins than before and the users will pay less, since their transaction will take less space.
The miners will someday, indeed, substitute the block rewards with the fees. That's obvious. The problem is that while their reward cuts in half every few years, they'll earn less coins and thus, they'll have less incentive to secure the network. It doesn't matter if a miner earns 1 BTC from fees plus 0.09765625 BTC as a reward. The fact that they'll earn less and less overtime means that the resources used in PoW will drop off. And that's true if we assume that they'll fill each block with transactions while the price, of course, remains stable.
For instance, what will happen if there aren't enough transactions in the mempool? If the miners' income depends mostly on the fees, then there're lots of factors that affect the practicality of Bitcoin.
I didn't want to mean that the system will corrupt at some point in the future, I just want you to confirm me that the incentive will decrease over time and therefore, so will the security.