1. Yes, and for many people it is the usual way to deal with Marwick (later in the game, he will force you to complete one dreadful quest if you are going to mess around with him when he is alive), as well as sacrificing whole newbie village to dragonflies, getting bonus gold and also getting musical instrument for free. If all dragonflies are dead, some more will respawn at midnight.
2. It is just there for cosmetic purpose.
3. Well requires you to have 200 or less gold and 15 Luck on active character. Once a week it can (but more often not) refill.

It never occurred to me to wipe out the Village. Does it wipe out the Village permanently or do they return if you reload. (Probably the former, otherwise you could keep wiping out the Village for cash.)

Anvils don't usually read button.

The well. Since I usually short luck in the start-up figuring the wells and barrels will quickly build that stat, maybe I was usually shy for the needed luck. Thanks for the solution.

I though you needed to keep a "Queen" fly alive for re-spawning to happen. Any would do?

Thanks
Bob

Island has full respawn each 6 months. Beside that, really important NPCs usually sit in houses and other buildings. There is a well on Emerald Isle which will increase your luck to 15 (16 if your Luck stat is even). It has limited charges, but it recharges in 1 month (save-reload reset timer for its recharge). Queen Dragonfly is just most powerful kind of dragonflies. She is just normal enemy and doesn't respawn any other flies.

1) There is an anvil in Emerald Island that reads "button." Does it do anything? I've tried to figure it out and never could.
Answer: The anvil will give 1,000 gold once a week IF you have 15 Luck & less than 200 gold.

Incorrect (I just tested). The well gives the money, not the anvil.

- if your quest notes doesn't feature a note titled "accepted fireball wand", you're good. I also like to lure the dragonflies to kill both Malwick and the blonde woman near the boat who sells you the lute for 500$.

- It's a fellow named Niles Stantley , Malwick's boss, who annoys you later in the game. NEVER do his quests - it will render access to Gavin Magnus/Archibald's court inaccessible for 2 years.

- While Stantley is in "quest mode" and until the whole ordeal is over and done with, the mercenary outpost is not accessible.
Keep this in mind if you are playing a Ranger and doing the light aligned Ranger Lord promotion.

- The only positive to that whole ordeal when the mercenaries attack you, is that your nice shiny Golem finally gets to earn his keep and you get to watch him in action. Too bad he doesn't follow you around the castle or chase intruders himself, though.