Flares produce enough light to roughly double the Spelunker's sight range in dark levels, increasing his field of vision.
They can be carried in the hands to illuminate the area near the Spelunker, or thrown to light up areas further away, for example to check the depth of a pit.
Flare can be used as a projectile weapon, and can be thrown quite far - this can also be a downside, however, because they will often fall off ledges or other hard-to-reach areas making them difficult to retrieve. Flares can be carried between levels, but aside from use as a weapon there's no real benefit for doing so, as a new box of flares will appear the next time you find a dark level.
Getting wet will extinguish flares, whether you drop them in water or fall in holding one. This is the only way flares may be destroyed as they have an unlimited lifespan.
The muzzle flash produces by firing a gun, will briefly illuminate the area with about the same brightness as a flare. This can be useful if you run out of light sources or do not want to juggle items, but be careful not to shoot into a shop.
There is always a flare on the Title screen, despite the area not being dark. It can be picked up and thrown normally.