Why does Chaucer use material from other literary works in his writing, The Canterbury Tales?
It shows a lack of originality and I would presume that the audience recognized it. But I don't know whether they appreciated it or not.
In Chaucer's "Wife of Bath's Prologue" and "Tale" in The Canterbury Tales, I believe that Chaucer would not have been worried about a lack of originality. Reading was still not a wide-spread activity. While there may have been an emerging middle class on its way at the time, the poor were not taught to read, nor could they afford books; only those with the Church, or the very wealthy would have had an education and be able to afford books. As Chaucer's tale criticized a great deal of what went on with the servants of the Church (such as the Pardoner), I doubt the Church was greatly pleased with his writing.
However, this literary piece is considered Chaucer's masterpiece. "The Canterbury Tales is recognized as the first book of poetry written in the English language" (a different version of English than what we speak). He was considered a student of human nature and obviously spent a great deal of time filling out his characters. Including famous/other literary works would have been appreciated by many, I'm sure, and would have made the book of poetry much richer. Much the way a comic movie uses allusions for humor that some of the audience won't get, the overall humor of the film may still work.
Using material from other works would lend authenticity in the areas where he chose to include it. And if the audience hearing the story (lower-class) or reading it (upper-class) did not appreciate the literary references included, the stories in the Prologue would have been very entertaining and well-received.