The only real way this will be resolved is if its tested and people notice a difference between a 1600p screen vs a 720p (or 1080p) screen.
There will be a point of diminishing returns, but until we can see really really high resolution 4" screens it will be purely a theoretical exercise of what we can perceive.
I used to think 480p screens looked great and wonderful until I saw a 720p screen. Now its a pain for me to look at a 480p screen on a 3.5" screen because I notice all the dots everywhere. I also think 1080p screens definitely look better than 720p screens, but 720p still looks great. But what if I saw a 4K screen, would that give me the same impression of progress compared to a 1080p screen? What about a 1600p or 2000p screen?
Ultimately if people notice a difference, and they will pay for that difference, then the market will make those products and we'll laugh at what we thought our limits were.
edit: and as people noted; resolution isn't purely a cost of glass problem - its about having the the processing power, and, in turn, the energy reserves to power something like that. Its already amazing to me that a 5" screen can have the same resolution as my 22" monitor...so even if higher much ppi was noticable for a person, the technology may hold us back a while until energy demands are controlled...i.e. higher performance/watt processors and lower power displays.