Vagn was the elder of Fyresdal in 1272. However, despite being an elder he lacked wisdom in regards to monsters: in particular being able to tell a dragon from a forktail and instead relied on folklore.
If Geralt helps him out and lies: Vagn was short and to the point, claiming they had a dragon problem and so Geralt set abut helping him, eventually luring out the forktail with Mia. Not wanting to dampen the man's spirits, Geralt lied and told him it was a (now dead) dragon, much to Vagn's delight.
If Geralt helps him out but tells the truth: Geralt helped out Vagn but soon learned it was just a common forktail, a much smaller looking creature compared to a dragon. However, when Geralt told Vagn this after killing it, Vagn claimed he could have dealt with the "forkytail" himself if he'd known and thus cut Geralt's agreed upon reward in half.