The Elven Merchant is found within the group of elves. Attacking him will raise your bounty by 1 and killing him will raise it by another 3, making you hostile to the other elves in the group.
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These are only some of the items which the merchant can have; the only one which is guaranteed is the Stark Needle. Try to update this list.
The Stark Needle is a very great sword for its weight. If you can't afford to buy it, it may be wise to kill the merchant in order to obtain it. There is frequently a Save Attendent in the elvish camp. You can always kill him, then use a Teleport Pill to escape.
It is unwise to kill the entire camp because the Elven Elder will raise your bounty by 10 when attacked and by another 30 when killed.