Question about congestion of the 1090MHz frequency
Additionally, there will be more aircraft interrogating (on 1030MHz) and responding to interrogations on 1090MHz for transponder based systems (TCAS, SSR).

Actually, no. More Mode S (vs Mode A/C) aircraft means TCAS can use Selective interrogation instead of All-Call interrogation, which will reduce congestion from unnecessary replies.
Also, newer TCAS systems are ADSB-aware and will reduce (not stop, for safety reasons) even their selective interrogation rate for ADSB targets, further reducing congestion.
Also also, part of the goal of ADSB is to reduce the need for SSR overlap, which will greatly reduce congestion as well.


... bandwidth limitations of 1 megabit/second. What does this mean?


Remember that this is a spatially distributed system, so congestion observed varies for each receiver based on which subset of transmitters they can hear. How far you can hear depends mostly on how high your antenna is.
The bandwidth number is a theoretical maximum data rate based on the bits per message and number of messages per second, assuming no overlap and no gaps. It will never happen in practice; it’s only useful as a yardstick for the current data rate.


What is physically limiting bandwidth? Will there eventually just be too much interference between signals whilst using this frequency,


Yes, see above.


Are the solutions to increasing capacity about being more clever with how the packets are sent (more efficient packet sizes, fewer packets, better/cleaner transmission),


The protocol is already as clean and efficient as it can be while remaining compatible with older Mode S equipment.
Most of the congestion comes from frequently sending redundant data as a crude form of FEC. Turn that off and congestion would go away, but so would the ability to gracefully degrade.

improving ground or air hardware,

One vendor (Airspy) claims to be able to decode overlapping messages, which if true would drastically reduce data loss and raise the practical bandwidth above the theoretical maximum. But I don’t know how well it works in practice or whether anyone is pursuing this for certified hardware.

or is there a &quot;add more lanes to the highway&quot; solution? It seems 978MHz is equivalent to adding more lanes.

That is allegedly why the FAA pushed UAT978 for light GA aircraft in the US.


What is the consequence of congestion? Are packets corrupted as noise rises?


The only real problem is collisions, not noise. Unless you define unreadable-due-to-collision messages as noise, of course.
The consequence is simply that you miss any data whose message was unreadable. However, the protocol was specifically designed to be highly redundant to minimize the impact of low to moderate levels of loss. Exactly how much loss it can tolerate is not clear, but so far it doesn’t seem to be a problem in practice.