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So, did it look a little like this?
Ice crystals in the upper atmosphere, even if there are too few to appear "cloudy", can refract light from the Sun or moon down to you. Because of the angles of the crystals, only light that's at exactly the right angle comes down. So all the crystals that appear, from your position, to be the same angle from the moon send some moonlight your way, and that's why it appears to be a circle!
The phenomenon is a little bit like a rainbow, which also has a characteristic size that's related to the angles inside raindrops. In fact, I think it's true that the moon halo is split into colors, much like a rainbow. However, at night your color vision is pretty poor so it's hard to notice the colors.
A recent news
item provides a nice illustration of what would happen if
you tried to put such an object in the solar system.
Supernovae explosions produce blast wave shocks that race out and heat the ISM. Young stars also heat the ISM with a similar type of shock wave called the stellar wind.
Now, if some of this hot gas comes in contact with some cool gas, conduction will heat the cool gas. However, if you've got so few atoms per cc, you can imagine that the time scales for two of them to crash into each other are big, so this kind of heating is not very efficient.
Well, mostly because conduction is such a poor method for cooling. The only other method is for atoms to release some energy in the form of light, i.e. radiative cooling, and loose some temperature.
This is a long and slow process.
The key point in either analogy is that our three-dimensional space is represented by the (2D) SURFACE of the sphere/balloon. In this analogy it doesn't make sense to look at the center, since the center of the balloon isn't part of space. It lies somewhere in hyperspace, but our observations have nothing to say about this point. As the universe expands, the fabric of space itself is actually growing, the universe is getting larger, just like the surface area of the balloon. On average every ant on the surface is moving away from every other ant. I say "on average", because one must allow for the possibility of an ant (or a galaxy) moving relative to the underlying space, at a rate greater than the expansion itself. A real life example is M31 (Andromeda galaxy). It happens to have a large peculiar velocity, in a direction towards us, and is actually blueshifted. On average, however, all galaxies are moving away from all others.
It's also not true that this recession velocity must be less than the speed of light. Einstein's special relativity does state that nothing may travel faster than the speed of light, but this holds for objects moving with respect to an underlying reference frame. Einstein's theory says nothing about how fast space itself can expand. Two galaxies that are receding from each other at twice the speed of light due to the expansion of the underlying space, are not able to exchange any kind of information, since this information is confined to travel through the expanding space itself, at a speed no greater than the speed of light. Thus Einstein's theory is not violated in any way.
If you think through this expanding balloon analogy in more depth, you will discover that the rate of recession between two ants must be proportional to the distance between the two. Again, this distance would not be calculated by drawing a straight line from one ant to the other, piercing the surface of the balloon, but instead by measuring the distance from one to the other along the surface of the balloon. Think the distance between Sydney and London (10562 miles / 16997 km) - what's meant is the path along the surface of the earth, not the length of a hypothetical tunnel through the center of the earth.
So, the fact that we can pick up light emitted by galaxies billions of years ago is explained by the fact that the universe (the surface of the balloon) has expanded to an incredible size, and the photons we receive from these galaxies cannot travel outside of our three-dimensional world.
I think the above should have also clarified why redshift is proportional
to distance. As you correctly state, the redshift depends on the relative
speed between the objects. By the sphere/balloon analogy you now
understand that in our expanding universe the average recession rate is
proportional to distance and hence the direct relation between distance
and redshift - Hubble's Law.
The main difference between comets and asteroids is composition. A comet is made of mostly ice while an asteriod is composed mostly of rocky material. This is the reason comets are so much more impressive in the sky when they come in near the sun -- they're melting! They leave a long trail of vaporized water behind them in their orbit as they get close to the sun and that trail, lit up by the sun, is what we see as 'comets' in the night sky. For more information on comets and asteroids, I suggest looking at NASA's website -- they've done missions to both!
Thanks to Alex McDaniel, David Lai, Shawfeng Dong, Gabe Prochter, Ian Dobbs-Dixon, Jay Strader, Justin Harker, Karrie Gilbert, Kyle Lanclos, Laura Langland-Shula, Lynne Raschke, Marla Geha, Michael Kuhlen, Nick Konidaris and Scott Seagroves