How do you defeat the monsters in town?

Just tap on them and your in-house development dragon will shoot fire on them. Remember that there is a delay of few seconds between you tap and your dragon kills it.

Killing those monster yields tiny amount of resources, that's true. But in my opinion, it's not worth it. And you don't get much benefit for day-to-day tasks. It's way better to focus on killing monsters those are out of the castle.