How does iOS compress photos when transferring to a PC or Mac?

When you import these photos over USB as JPEGs they will be transcoded as they're transferred. This means that photos are not stored twice on the phone in two different formats, and they're also not all batch-converted as soon as you plug in the device.

In this particular case, you definitely want to download the .HEIC file. Even though it is smaller, it is actually the file format that the photo is stored in on the phone. If you choose to download as .JPEG then the quality is most probably worse (and never better) - even though the file size might be larger. Every transcode of a file to a lossy format (such as JPEG) comes with a loss of quality - therefore you want to avoid such transcodes for getting the best possible quality.