All operating systems have slack space issues. All of them, Windows, DOS, Mac, Linux, UNIX, OS2, AmigaDOS, any other OS you can think of, period.
Data is stored on disks in units called sectors. Typically, a sector is 512 bytes, although it may rarely be larger. The basic rule for all operating systems is one file (or part of one file) per sector, period. No operating system I’ve ever heard of stores more than one file per sector. If you have a file with a length of only one byte, it uses a whole sector, leaving 511 bytes of slack space. If you have a file that is 513 bytes in length, it uses two sectors, again leaving 511 bytes of slack space.
The issue with MS DOS and Windows is that they group sectors together in units called clusters. Cluster size is variable, generally with the capacity of the device (higher capacity = larger cluster size). Floppy diskettes have a cluster size of 512 bytes (one sector). FAT16 (FAT stands for File Allocation Table, btw) devices between 1 and 2 GB use a 32768 byte cluster size (64 sectors). Clusters have the same rule as sectors, only one file each. Since the highest potential amount of slack space is about 64 times higher than a sector-based storage system, slack space is higher, usually 64 times as great (16384, the average slack/file with 32768Byte clusters, divided by 256, the average slack/file with 512 byte clusters. [nitpicker warning] I rounded to integers, so piss off [/nitpicker warning])
Why did Bill G. saddle us with this ineffecient storage system? It simplifies things. A 2GB drive formatted with a sector-based storage system (like AmigaDOS’ trackdisk.device) has 4194304 storage units. The same drive formatted with Microsoft’s FAT16 (2GB is the largest size FAT16 can handle, BTW) has 65536 storage units, a much more manageable level. If you hadn’t noticed, 65536 is 2^16. See any similarity with the name for Microsoft’s old disk formatting scheme? This manageability dramatically reduces overhead in processing read/write requests to the disk subsystem, improving speed in many tasks. Gigabytes are cheaper than GigaHertz (more disk space is cheaper than a faster CPU, for the non-geeks).