I did not follow the anime or manga for ID but I do know that it
should not be called 'misfiring' in real life. The term 'misfiring'
is used to describe a timing problem in the engine firing sequence
of the pistons.
Basically the problem is instead of the piston firing properly at
the correct time to add more power, it is firing at the wrong time
and produces power which acts against the other pistons. Main
symptom of this problem is power loss, if the problem is not so
severe. You'll just feel that you don't seem to be getting the
correct power for the rpm. More severe cases would involve the car
jerking regularly, in this case, stop the car and call a tow
truck.
For the EVO3 in the game, the reason why there is a 'lighting up'
at the exhaust is because of the ECU. The ECU has been set up so
that it is delivering a very, very rich content of fuel air mixture
into the engine. This would give more power which would translate
into better acceleration. This does not help in higher top speed as
there is a limit to how much fuel air is burnt in the engine.
At the start since the car is still stationary, there is not much
need for power. Therefore most of this fuel air mixture is not
burnt in the engine and is passed out through the exhaust. Since
most of the oxygen has already been used up in the engine, this
exhaust gas will not flare up while passing through the exhaust
pipe. Until it reaches the outside environment (out of the pipe)
where there is more oxygen then it just flares up.
This is not very good for the engine, in terms of temperature and
stress. It's just like having the Nitro system. But Nitro is worse
since they're pumping a very high percentage of oxygen into the
engine. I think it's about 90%. That's why there is a constant
bluish flame coming out of the exhaust pipe. The unused oxygen just
fires up.
Edit: As for whether this sytem gives the EVO3 better acceleration
in the game, I don't know.