Yes, I often use a small delay effect (echo) on my solos, but not when I play rhythm. Sometimes I use the delay in my PODxt, and sometimes I add a delay plug-in after I've recorded. It depends on what I want to do
The only reason I do it is because I find it much easier make the guitar fit in the mix when there are some echo effect on. It just blends in
I understand why you ask the question about the notes overlapping, because theoretically it should just sound like a big mess! However, when we use echo as an effect to make the guitar fit better - we don't want the echo too loud. It should be very low in volume (often around 20 - 30%). And also, the way I set up my echo, I put a Hi-cut filter on it so that there are no problems with the phase. This also kind of prevents the overlapping notes issue, to some degree...
Let me explain that part a little more.
So lets say I have a solo tone that is within the frequency range of 200 Hz up to about 8 KHz (just as an example). Then I often don't want the echo on all those frequencies as well, so I "cut away" all the frequencies above say 4 KHz. So this means that the echo only is at the range from 200 Hz to 4 KHz, and we have from 4 KHz up to 8 KHz alone for the solo tone.
I hope this answered your questions