Color Settings: What do they really do?

Question

The Edit > Color Settings command has choices "No Color Management", "Optimize for Computer Screens", and "Optimize for Printing". The documentation states that the latter two choices select sRGB and AdobeRGB color spaces, respectively.
What's not so clear are the conditions under which this selected color space is imposed. I once imagined that it specifies the working color space that the Editor uses. But if that were true, then I would expect that the image, once brought into the Editor, would be converted to the selected color space. What actually happens is that the image remains in its original color space unless an explicit Image > Convert Color Profile command is issued. (This is evident in the image properties dialog or the print dialog.)
So my question is: What is the actual use that PSE5 makes of the color space that is selected by Edit > Color Settings? Is this just for dealing with source images that are untagged or that are tagged with a profile other than sRGB or AdobeRGB?
It seems to me that it might be desirable to convert sRGB images to AdobeRGB prior to editing them. Then color adjustments or other editing operations could take advantage of the wider gamut of AdobeRGB compared to sRGB. The adjusted results might then include colors that are out-of-gamut for sRGB and that can improve the appearance of the printed output. But perhaps I am mistaken about whether this is really useful in practice.
(The above discussion assumes that the images originate as JPEGs. I realize that the color space story is entirely different for images originating as camera RAWs.)

Answer 1

Ed.....
The settings in Edit > Colour Settings have, in my opinion, misleading titles. You need to read carefully the small print that appears at the bottom of the Window which describes what each does.
b No Colour Management......
this is the obvious one. Elements performs no colour management and so you'll see your images just as if you where using any other Non-Colour Managed program...for example IE7. It also means that new documents you create from scratch will have your Monitor Profile associated with them which is not very useful.
b Optimise for Screen and Optimise for Print......
these turn on Colour Management but neither has any effect if the image you are opening already has a profile associated with it. The embedded profile gets honoured and thats what your working space will be.
If your image does not have a profile associated with it then Elements assigns sRGB if you set the 'Screen' option or AdobeRGB if you set the 'Print' option. This may or may not be the right choice for the image, depending on how it was created.
If you create a New Document from scratch then each setting decides the choice of working space - 'Screen' > sRGB, 'Print' > AdobeRGB
In v4 there is also a 'Allow me to Choose' option which checks that the image has a profile and uses that but if not then allows you to choose sRGB or AdobeRGB.
Converting from sRGB to AdobeRGB has no real advantage since the sRGB colour space is smaller. If the image source doesn't have the colours then converting wont produce them. The reverse is different. The conversion process has to decide how to map colours on the edge of the AdobeRGB space into a smaller space and still keep the general perception of colours the same. Typically they are just thrown away in Elements but on full Photoshop you have more control over this process.
RAW images as you say are different but still effected by the Colour Settings. If you have the 'Screen' option set then once you process the RAW image the result is in the sRGB space. Likewise if you choose 'Print' then the image is in AdobeRGB.
RAW images are in a very much wider space than AdobeRGB so you're possibily throwing away more colours. However, keep in mind that your display is probably close to sRGB and your printer may be totally different in its capability of re-producing colours.
Colin