What kind of things would you use this to simulate ?

Is this to make sure services are wired up with permission and communicate properly before you deploy or what is the use case ?

Also, why not have a dev environment where you can test things on the real thing (ideally with smaller size instances to save $)

Intergration testing is one. You can run this in your ci/locally to speed up tests. Or just for local dev. We do this with localstack[1]

[1] https://www.localstack.cloud/