I'm pretty sure Rails doesn't support .svg yet, hence why it would ignore it.
You'll need to include the file extensions in your config/application.rb file:
#config/application.rb
config.assets.precompile += %w(.svg)
In regards the application concerning itself with the production environment, you have to remember that the precompilation process is meant for production:
The first feature of the pipeline is to concatenate assets, which can reduce the number of requests that a browser makes to render a web page. Web browsers are limited in the number of requests that they can make in parallel, so fewer requests can mean faster loading for your application.
Concantenating assets essentially means to compile your asset files into a single file, which is typically then minified.
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Although this can be done in real-time, it's mostly the realm of static assets (which have to be precompiled). This means that if you run the rake asstes:precompile task, it will work on the development environment, unless you call RAILS_ENV=production rake assets:precompile (which sets it to the production environment for that request.
why does it concern itself with the production environment when I am doing everything in development
The application is going to run in production, not development.
Ultimately, everything you do in development should make it easier / better to work in production. In the sense of your assets, it means that you can use many of the quirks of Rails' asset pipeline, from sprockets to preprocessors such as SASS & Coffeescript
