It's difficult to find colones outside Costa Rica. If you do, you'll take a real hit and the exchange rate won't be anywhere near what it is here. Wait until you get to Costa Rica. ATMs are an easy way to get them.
The tourist industry prices its offerings in dollars. That stems from all the years when the dollar/colón rate was notoriously unstable. Things have settled down in recent years. You can pay in dollars or whatever the equivalent rate is in colones. If you charge a hotel stay to your credit card, it will show up on your slip in colones, but the amount will be converted to dollars when you get your statement.
Stores and restaurants price things in colones. Many will take dollars for your purchases (although no one is ever obligated to accept them). If they do take your dollars, they may very well calculate an exchange rate that's in their favor and not yours. Small places are not set up to take dollars. If you're going to bring dollars, make sure they are in good condition. They don't have to be brand new, but they should not have tears or markings. Also, don't bring anything larger than $20 bills. Many counterfeit $50 and $100 bills circulate, and people will generally refuse them. U.S. coins are worthless here, of course.
I always tip in local currency. Don't saddle the poor worker with having to go to a bank to exchange your dollars.