you explained elsewhere how the overlap is used for relocatability, which is a reasonable justification. But if that were not a concern, non overlapping segments would have provided for a larger address space. I will readily admit that I'm not aware of all the constraints that lead to the 8086 design.

386 (not sure how 286 works) did extend segments to a larger address space, by converting them to segment selectors, but it requires a significantly more complex MMU as it is a form of virtual memory.