Where is `defaults -currentHost write domain key value` written to

The network library is intended for client computers bound to a network domain server. A domain server acts as a central repository for configuration information -- mostly user accounts, but also (among other things) mount records. Mount records tell the client computers to automatically mount a certain file server share point automatically. If you use this to tell all the clients to mount a particular share point on /Network/Library, then you can put Preferences, Fonts, etc folders inside that share point and they'll be automatically available on all clients in the network domain.

This used to be a common way to manage network clients in NextStep (the predecessor of OS X), but is very rarely used in OS X. There are better ways to do most thing now, like putting managed preference settings directly in the network domain. At this point, the network library is more of a historical artifact than anything else...

I couldn't find any way to apply the changes, but you could also use UI scripting to change the setting.

tell application "System Events" to tell process "System Preferences"
    try
        set visible to false
    end try
    tell application "System Preferences" to reveal pane id "com.apple.preference.mouse"
    tell radio group 1 of window 1
        if value of radio button 1 is 1 then
            click radio button 2
        else
            click radio button 1
        end if
    end tell
end tell
quit application "System Preferences"