If you're working in the same physical room as one of your teammates and you both join the same Tandem call on your laptops, turning on this setting prevents you from hearing each other's Tandem audio stream through your laptops. This is useful if you are sitting close to someone and can hear them well in person.
Remote teammates may still hear an echo effect when when office teammates are speaking with multiple microphones unmuted at the same time. To prevent this, office teammates can either share a computer mic OR keep their mic muted when not speaking and use the space bar to "push to talk" to speak.
Tandem also has a global mute/unmute shortcut which can be customized in Tandem preferences. The default is shift-command-m (Mac) or shift-control-m (Windows)