Difference between .rar and .zip

What is the difference between .rar and .zip, and why do so many people use .rar?

"but tar leaves a lot to be desired"

possibly because tar isn't a compression algorithm at all! it just packages up a lot of files into one .tar file, preserving things like the modification times and file permissions. the .tar file is THEN compressed, usually with gzip to make a .tar.gz or .tgz 'tarball', or with bzip2 to make a .tar.bz2 or .tbz

"So, for general purpose archiving over a variety of formats including video, images, text, music, and pure binary/random data which program averages the best compression ratio? Which program is the most popular archiver?"

The impression I get from most sources is rar offers the best compression. however zip is by far the most common, present on all windows xp systems, all major linux distributions, and likely to be on most older windows systems (I can't speak for mac, sorry). if your target is *ix systems only, bzip2 offers the best combination of good compression and near-certain presence on the client.

"Also, soon I'm going to be distributing a large torrent of PSD and PNG images totalling over 500mb. What will shrink it the best?"

well, both psd and png images are already compressed (losslessly), meaning whatever compression you use, don't expect much, so you may as well ignore compression ratio and go with zip, as that's the most widely supported