The 3 databases question

So when you create a new ROR app, it wants to use 3 databases: development, testing and production. I understand the place of dev and testing on the localhost, but I don't understand why you need a production database on localhost? What is the common practice when you deploy your rails app, do you have the 3 databases on your hosting server or just have a testing and production?

I'd like to know more about the big picture of using the 3 databases from development to testing to production. A real world example you can cite?

I typically only use two, and use the same info for development and production.