> I have Lan with private ip address that send packets to
> public internet. How does an proxy server solve the private ip
> address versus my public ip address problem?

Simply through not routing / NATting at all. 

Instead of just forwarding the packets rewriting the IP headers like a NAT
device does, an application layer proxy does the connections to the outside
world *INSTEAD* of the client.

To use the popular example of HTTP:
While a NAT device will just forward and rewrite your query to a server's
port 80/TCP and then forward and rewrite the reply according to its
connection table, an application layer proxy will do the query *itself*. It
will then process the reply, identify whether it looks like HTML that
matches its quality/security requirements and then give a friendly reply to
the client that originally did the query. 

Again, the proxy itself plays client on the application layer. 

This of course means that all outgoing connections are also done with the
external IP address of the application level proxy machine. 

Clear now?
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