Less communities on their instances means less traffic, less activities, less moderation reports (they would have to deal only with users on their own instances)

Those users are the same as in our universe for lemm.ee as a user instance. They stir the same dramas, create the same number of alts, violate rules in a similar way.

if even then they are overloaded with work, they could decide to scale down the operation before reaching burning-out point: close the instance for new registrations, make user registration conditional on payment/donation, etc.

That was available to the lemm.ee admins in our scenario as well. They preferred to shut the instance down rather than reduce.