For the alert, you are doing the encoding yourself. Perhaps it looks the same as on the server-side if you removed encodeURIComponent.
On the server side, ASP.NET will always show you the unencoded form. This is to make it easier to directly map to files that also have text that needed to be (un)encoded.
Note that you can replace every letter for its UTF8 representation in URL Encoding. It will still be the same URL. I.e., type the following in the browser window and it will still work: %66%59%6E%64.aspx?location=Seattle%2C%20WA. To only encode the necessary chars, use UrlEncode on the server side if you create a link yourself.
URL encoding can become fairly tricky. You ask to explain it. To know the correct escape of a certain character, you need to know how that character looks in UTF8. The hexadecimal value of the UTF-8 bytes then become the %XX%YY value of your letter. Sometimes it's one %XX, but it can be up to six byte sequences in total (some Chinese characters for instance).
URL Encoding works one way only. Never double-encode or double-unencode. This is prohibited by the specification. Also, because you can encode any character, it is not always possible (as you found out) to do roundtrip encoding/unencoding. If you unencode and re-encode again, it is well possible that the resulting string is different, but syntactically the same.
In HTML, URL Encoding is sometimes interspersed with HTML Encoding. I.e., the ampersand is valid in HTML, but not in HTML. find.aspx?city=A&name=B becomes find.aspx?city=A&name=B in and HTML URL. However, browsers are lenient and will accept wrongly HTML-encoded strings.
Finally, a not on the browser: if you type in a space in a link, even inside an <a> tag, it will escape the space (or other character) for you. Likewise, it will nowadays show the odd characters (é, ï etc) in the address bar, but when it sends it over HTTP, the browser will correctly do the encoding for you.
Update: about anwering your question of needing a "definitive" reference or proof.
While I couldn't find any on the internet, I decided to look for it myself using Reflector. Going through the methods that set, for instance, the HttpRequest.QueryString, you quickly encounter the private method HttpRequest.FillInQueryStringCollection which then calls HttpValueCollection.FillfromEncodedBytes. Somewhat near the end of that method, HttpUtility.UrlDecode is called for the values. Conclusion: do not call it yourself, to prevent double decoding.
You can see this for yourself when you download Reflector and disassemble the .NET libs of System.Web.