The Most Revd Justin Welby also accused the Ukip leader of legitimising racism and "accentuating fear for political gain", as he gave evidence to the Commons Home Affairs Committee on Tuesday.
Mr Farage has attracted widespread condemnation since saying at the weekend that the New Year's Eve sexual assaults in Cologne last year - many of which were thought to have been perpetuated by men of Arab or North African background - could be repeated in the UK if the country voted to remain in the EU.
Sitting alongside the Right Reverend the Lord Bishop of Durham Paul Butler, the archbishop participated in the committee's investigation into migration and asylum.
He said the Government needed to invest "significant extra resources" into areas including education, housing and health, to boost the stability and infrastructure of UK communities accepting new migrants.
The Most Revd Justin Welby said: "[This] actually, in my experience, liberates the natural generosity of people to welcome once the causes or the reasons for fear have been dispelled - and they are quite easily dispelled."
Claiming some people do have genuine fears for the consequences of mass migration, he said this does not make such individuals racist.
The archbishop went on to say he did not agree with claims the UK was full and could not accept anymore migrants but stated there is a limit on the number of people the country is able to support.
He also acknowledged no refugees had moved into Lambeth Palace, nine months after he offered a home to a Syrian family but added it is hoped one will arrive within "a reasonable distance" of time.
Claiming the Government would be "absolutely irresponsible" to ignore concerns about the impact of immigration on communities and public services, Rt Revd Justin Welby added: "There is also a point when we say that the role of government has to be to say certain things need to be done and certain things are right and to allay people's fears."
Nigel Farage said: "I haven't scaremongered in any way at all.
"I'm not going to stand here and attack the Archbishop of Canterbury but I think he would have done better to have actually read what I said.
"And he would do well to listen to see what the head of the Roman Catholic church in Germany has said because he has made some very robust comments indeed.