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Should I kill someone for trying to burn down the town with magic?

That's something you should decide yourself. It's allowed in the rules, as you have an rp reason.

On the other hand, I think you wouldn't get very far against a mage, especially as you only just joined; he'd probably kill you in 2-3 seconds.

I'm not sure of his own skills. He was casting fire at water.

.. Did he BURN DOWN THE TOWN or did he CAST SPELLS ON WATER?

There's a big difference...

In this game, you can kill anyone provided that:

A) You give him/her a chance for it to end differently

Example: "Give me all your money!" instead of just PKing them

B) You Rp a bit before, make it clear what you want.

So no #someone casts a fireball #me runs and slashes
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Now those are the GAME rules. However each town might have rules which don't allow you to kill people in the town ect.

If you break GAME rules, you get banned/punished.
If you break town rules, its all in character, you might end up "Wanted", you might get arrested, or kicked out of town.

Oh and if you attack a mage, chances are you'll get your (burnt) a** handed back to you.

.. Did he BURN DOWN THE TOWN or did he CAST SPELLS ON WATER?

There's a big difference...

He cast a spell, then allowed the fire to spread while watching it.

As long as I know... magical fire doesn't spread.

Magical Illusions dont do as well...

This one did.

He probably just cast another spell and made more fires.. or it wasn't his fire. Magical fire DOESN'T spread.