So where does the .0005 fee go when it is collected?
To the miner that solves the block. We have fees to provide an incentive to miners, who ultimately are what run the network. Eventually, after the rewards diminish, the idea is that fees will be enough incentive for people to continue to mine, even if they only make a few coins for generating the block. Really, the fees aren't enough right now, and a while back (I don't know if people still do it) were mining 'empty' blocks without transactions to avoid fees, simply because it was easier.
Fees keep the network alive
Fees make transactions happen faster
Without paying the fees, Bitcoin will probably die in the future.
