Competition forces improvement. If a company has rival companies that sell a similar product, both companies are forced to improve and innovate. If a classroom is full of outstanding students, it'll often become much harder to pass as the teachers will set their expectations much higher.
In this case it can cause quite a few issues if a teacher sets higher expectations as it'll easily lead to students getting burnout and/or dropping out. They'll probably also experience a huge blow to their ego, as students that usually easily average A's might suddenly be averaging B's. Thus they might even start doubting their own capabilities and intelligence.