I have always had the opinion that the more Mpx the better. More Mpx means more resolution and thus ability to distinguish more detail, perform tighter crops, large prints,....
Of course sensor technology must be good enough to achieve a good performance (quantum efficiency, etc...) so this could possible not apply to smaller sensor sizes like those found in cheaper compact cameras. But in FF, 1.3, 1.6, 4/3 formats it seemed to me that there is still room to increase Mpx.
Noise per pixel will be higher in those cameras, but this does not mean they are more noisy since after a rescaling process to match the size of comparision, noise would be statistically averaged and final SNR per pixel would be the same as in the camera with larger pixels.
I have found a very interesting plot from Roger N. Clark that relates the quality of image to the pixel and sensor size. He proposes a definition of Apparent Image Quality taking into account both resolution and SNR and relates this AIQ to pixel size for various camera formats (see dotted curves):
The graph clearly shows that there is still room to increase the number of Mpx getting higher AIQ up to a point over 5 microns, where diffraction begins to limit the improvement.
He adds that for very small pixel pitchs (less than 2 microns), the effect of low DR for having very few electrons in ech photocell makes the AIQ fall even more quickly.
Taking for example the FF curve, 5 microns would mean (at f/8.0 in Clark's plot):
35mm / 5 microns/pixel =~ 7000 pixels
Accounting a total: 7000 * (7000 * 2/3) = 32.7 Mpx
(remember that Canon 5D y Nikon D3 FF have ~12 Mpx).
Question: I find Clark's findings very logical and numbers seem to give credit to him.
But I wonder: why after the point in which diffraction starts to affect AIQ (about 5 microns for the bigger formats) the AIQ value starts to fall down? If diffraction at a given apperture produces image blurring, once the pixel pitch chosen is smaller than this blurring (circle of confusion or whatever it is called), why should AIQ go down?
I think it should simply stop improving, i.e. remain flat since no more improving is achieved having smaller photocells. But according to Clark's plot it starts a quick falling down. I cannot understand this part of the curves. Could someone explain this behaviour?

