I'm not sure about the main question, but from memories of my old 800XL, the Atari 8-bits were a little more primitive than proper HSV/HSL, which can still produce a wide palette. Instead they used a partial version, where you had 16 colours to choose from (H) and 16 levels of brightness (L) for a total of 256 possible colours. Special tricks were needed to show them all on screen though, similar to copper tricks on the Amiga. Typically you'd only have 16 of them on screen at any one time.
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