It's easy to see that images in the passenger side-view mirror are smaller than they are in reality. All you need to do is check the mirror and then glance over your right shoulder. And this is why they seem farther away -- we judge distance by the relative size of objects. Our brains compare how big a car looks in the mirror with how big it is in real life, and the greater the discrepancy, the greater the perceived distance.
That's not the only thing going on here, though. In fact, the distance thing is a side effect.
To gloss over some basic physics: We can't actually see light until it hits something [source: Flinn]. When it bounces off an object and lands at our eye, we can see it -- as an image.
Light reacts in specific ways to an object's various surface traits (color, texture, shape, etc.), producing visual data our eyes can interpret to construct the image the light bounced off of.
When light reflects off a flat object, like an image in a flat mirror, it bounces off in the same direction at which it hit. The path of the light carrying the data back to our eyes is unaltered, and the image our eyes construct is in tune with reality.
Curve that mirror, though, and you alter the path the light travels to reach our eyes. Let's say you curve the mirror so that the center bulges toward your eye. This mirror is now convex, like a bowl turned upside-down, and like the side-view mirror on the passenger side.
When light hits a convex mirror, the curved surface changes the light's behavior. Close to the center, light bounces in a relatively unaltered path to our eyes; the farther outward the light hits, the farther outward it bounces. The result is that when light hits a convex mirror, the rays diverge, spreading out before reaching our eyes.
So, let's say light is bouncing off an image of a car in the convex side-view mirror ...