What is the purpose of WCF Service Library? I understand if you build an IIS hosted service you create a web project, if self-hosted - create an .exe.
What is a rea
I would always create a WCF library as a class library - it's much easier to use. You have total flexibility to then either host your WCF service inside IIS (by supplying a virtual directory and a .svc file inside it), or you could write your own self-hosting EXE and reference the WCF service in the class library from it.
Putting a WCF service directly into a web project seems like a really bad idea and might only be useful for very simple instructional purposes - just to show how to get started. I would never do this for a "live" system.
Marc