The 650 size is used on some Tri bikes. And yes, smaller riders, can benefit from the smaller wheel. It allows a smaller frame size, something kids and short women or even men may need. Also, several kids race bikes use 24" road wheels like the Felt f24. The Trek KDS uses 24" or 650 also as do the others.
As far as tires, width matters only to a point. 1st I will mention widths aren't always precise. One brand's 25 may be almost the same size as another brands 23 for example. Next, the total weight on the tires is important. A 200+ pound rider on 21s will actually be slower than on a wider tire. The reason is that the narrow tire will deflect and squirm too much under the weight. Simply put: not enough tire for the weight. I, and most performance/racer types use 23 and 25 to a less extent. If you have similar weight and pressure tires there isn't a big difference at all in this small range of tire width. 23 is popular because it supports most racer weight people in the 150 to 190 lb range and can be lighter than a 25. Few people use the 18-21 width because of what I mentioned above, plus greater chance of pinch flats, harsh ride (not enough air volume to absorb road shock) and less stability. This is why 23 to 25 are favored by riders and why manufacturers spec bikes with them.
EDIT: To add to this simple rolling resistence numbers do not reflect real road conditions. Here's a blurb on the subject of PSI: http://www.velonews.com/article/7508
It indicates, and is corrborated by many others that very high pressures may SEEM faster but in reality are not. The harshness felt in very narrow, high pressure tires actually indicates a lot of upward motion expending energy in the bounce and not forward motion. With this information in hand, it seems a fine balance between tire size and pressure is best. It's a debate that has been going on for sometime now.
In addition, rider comfort is an important issue as well as control (read about the car/jeep example in the link). A harsh ride will fatigue even the the best rider. So much attention is given to the bike frame regarding compliance vs stiffness, while wheels and tires can affect the ride as much or more than the frame, yet are not considered with the weight they deserve on this issue.
Rolling resistence and tire width are only part of the equation. Mountian bikers seem far more in tune to these real life condtions because the effects are more pronounced.
EDIT: Mr G I remember. But "pump to the max" is relative. If the max is 110psi (23 cm) then it's not really wrong. What it wrong is using the term. I have tires with a max of 145 - I pump them to 105-110.