As for the flip side, to see its goodness through the spirit, I see two different factors to consider here. One is the identification with a false reality, and the second is empathy. The two are related. By identification, I mean investing our sense of “self” into the fantasy of the play (or TV show or sports game or election or whatever), so that we feel, on a subconscious or emotional level, that the occurrences within the object of our identification are happening to “us” (e.g. people who feel as if they have won when “their team” wins a sports game, when really those spectators won nothing, and merely watched the game on the couch).
The relationship between that tendency and empathy is clear. Empathy is obviously a positive quality. Compassion and love are integral to religion and integral to humanity. The ability to care about others as much as we care about ourselves is critical to our existence, and Jesus placed this ability as second only to the importance of loving God (Matthew 22:37-39).
That same tendency for empathy can also be projected onto a fantasy, which is what Augustine was experiencing (and truly, all of us do this). Though even the identification with delusion has some good in it. If our minds were constantly focused only on higher truths, we would neglect the needs of both ourselves and others here in the material world.
As always with these things, I think the answer is balance. We need simultaneous cognizance of both absolute and relative truth, both the spiritual and the material. For most of us (myself included), there is a definite bias towards being identified with physical reality, though it’s also possible to go too far to the other extreme as well, and there are many cases of people who do. In a sense, our identification with physical reality is a type of “delusion.” Ultimately, this world is nothing but dust and shadows. As Solomon tells us, “all is vanity” (cf. Ecc 1:2-11). Yet, it can at times be a useful delusion if it keeps us from abandoning the responsibilities and obligations of our earthly life.