Do merchants in the US border towns of Mexico accept USD as currency? If not, where are the currency exchange facilities available while driving in to Mexico from the US? Another related question: Is one currency preferred over the other?
Many do, but at a very poor exchange rate. At the time of this post, there are 13.15 mexican pesos per US dollar. But you'll usually get an exchange rate in the range of 10:1-11.5:1. I saw several exchange rates in this range in Puerto Vallarta (which isn't a border town, but does cater to many US tourists) last weekend.
The best exchange rate will probably be from your local bank, but will likely require that you order your pesos at least a week or two in advance of your trip.
The next best bet is probably from an ATM, especially if your home bank doesn't charge a currency conversion fee. Most credit unions won't, and many larger banks will have deals with a local Mexican bank to avoid such fees. Bank of America allows free cash withdraws from Santander ATMs, for instance.
You can also change your cash from U.S. to Mexican currency (or vice versa) at many locations on either side of the border, and are called "Casa de Cambio" (translation: Change House). The exchange rates vary, and aren't as good as you'll get from a bank, but are better than you'll get from a vendor accepting U.S. dollars.