Think of it like a specific bill. A $20 bill with its own serial number. You can have 4x $5 bills that are worth the same amount inside your wallet, but they take up more room. You can have a 5# sack of pennies worth $20, but it is even harder to carry and transact with.

On Bitcoin that is more data, which costs more to transfer over the network.

A UTXO that is a very low amount (<1000 sats) is considered “dust”, because to move it on chain would cost more than it is worth. It can’t pay for its own transaction fee.

A 100,000 sat UTXO might cost 10% of its value to move on chain, but a 0.5 BTC UTXO might only cost <0.1% of its value to move.

1 large UTXO is cheaper to spend than multiple small ones, because more data.

UTXOs are also important for privacy and security. You don’t want to spend your non KYC UTXOs in the same transaction as KYC/aml coins. Keep them segregated by labeling them in a wallet like sparrow.