From one of the very first quests. But only the first time you do it. If it doesn't drop, you'll need to delete a character and start a new one and try agsin.

If they are on a team with you, yes. A "regular" team, not a public team.

Explosive Bait, which you learn to make in a certain quest, can be used to damage camps of pacifist players and grief events which require keeping NPCs alive.