A question on hightmaps

I know that plsm2 supports 16 raw and 8 bit raw files but5 what is the algormatic differince?
Dose the 16 bit alow for a higher max hight or just more detail. And what about the TC algo dose that alow for a incress in max hight?
Reson i ask is im using freeworld 3d to create the world and it allows me to set the max hight and limit so it never goes over. But i need to know what i should set my limit at 255 or 65536

It allows for more detail (more resolution to the height value).

The ScaleY value in the config file is used to set the maximum height of the terrain. It can be anything you want. However as you know, 8 bits gives you 256 possible height values. If you set your ScaleY to 256 with an 8 bit heightmap, you're terrain will have 1 meter resolution for each vertex, so you can't have a really smooth terrain in that case. If your ScaleY is 256 with 16 bit heightmap, you can have a 0.004 meter resolution per vert, so much smoother height values.

You can of course set your ScaleY to whatever you want - 2000, etc.