You can host the PAC file on any location that the browser can reach by itself, with no proxy configured. The MWG hosting the file is just a convenient place to put it, but the MWG itself has no effect on the file.
As far as editing, I generally use just a text editor. I don't know of any tools that would make it easier. It is just a file with Java Script however, so some editors may be able to provide some assistance that others may not.
You must host the pac file on a webserver. As per the specification it must be served over http and the content-type from the server must be application/x-ns-proxy-autoconfig (for maximum compatibility)
1) Make sure you save it as an ascii file and not some other encoding (like UTF8) as some browsers can be picky (IE 6)
2) Pacparser has a command line tool for verifying the pac file for errors that is very useful.
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