Can anyone explain in detail what this option does?

This means that the stations that are assigned to that dispatch centre are the only ones that will be considered for spawning a mission. Eg, if theres 3 fire stations to that dispatch, and another 4 outside of it, the stations within that dispatch will only be able to spawn missions that require 3 or less fire stations.

Without this option, the stations within the dispatch centre are able to see all 7 fire stations, and spawn missions that require up to 7 fire stations.

The first option prevents all stations assigned to that dispatch center from spawning missions.