Each screen pixel has two colours because there are two screen layers, a foreground layer and a background layer. Anything you draw to the foreground layer will be draw over anything on the background layer, so you can use the foreground layer for fast-moving elements like mouse cursors and game characters without having to redraw the entire background every frame.

So each pixel has a colour on the foreground layer and a colour on the background layer, and will be drawn as one or the other. Normally the foreground colour of the pixel will be the colour used, but if the foreground colour is palette colour 0 (treated as transparent), the background colour will be used instead.