How do system wide proxy settings work?

System wide proxy settings are just another consolidated place for proxy settings. It actually modifies the places where different apps' config files. Have you noticed, system wide proxy setting asks for password 2 times? This is mainly because of the modification of two admin files which corresponds to config file.

And yes, from 10.10 and 11.10, some apps have been left out of system wide proxy setting most notable among them is the synaptic.

and moreover, apps can bypass the system wide setting and make use of their own setting again most notable synaptics and Mozilla Firefox(which contains system settings option as well).

It is up to the programmer if his software uses proxy settings. Though a lot of software does, there are some programs which are not working with proxies at all (e.g. ubuntuone-filesync).

System wide proxy settings modifies

• /etc/environment
• /etc/apt/apt.conf
• /etc/gconf/gconf.xml.defaults/%gconf-tree.xml

(This is for Ubuntu 11.04)