Channel capacity limits indicate the maximum information that can be transmitted without distortion. In the context of machine learning and neural networks, these limits affect how well models learn and generalize from data. Exceeding capacity can cause overfitting, where models learn noise instead of useful patterns, adversely impacting predictions. On the other hand, underutilizing capacity may result in underfitting, preventing models from capturing data complexity and leading to missed predictions. Balancing channel capacity is vital for effective learning and prediction, with factors such as information encoding, feature selection, and model complexity playing crucial roles in optimizing performance.