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You can annoy your councillors into leaving their posts, for example Tsanna likes to let the merchants sort themselves out, if you keep ignoring her advice and favouring one side or the other she will walk.
It's not that I flavour the common folk it's just that with nearly every "choice" the sensible option also happens to be the one favouring them. Give me one where the sensible choice favours the merchant or if you must have shades of grey one like the tac collector issue where I both sides had a point but I came down on the tax collectors side because of the lore regarding their order.
Only way to F up is by not making choices and ignoring Kingdom Managment.
Get Tsaana if you are concerned about your personaliy affecting choices, she lets them fight like in a Coleseum and only the strong survive.
You have to remember that this game is taking place in a medieval society. Which means that the bulk of the economy is sustained by the nobility. Peasants and other common folk don't have that much money to throw around, and probably devote all their income to paying for the essentials they need to survive, or remain in business.
In both logical and RP terms, holding a fair for the common folk might be good for getting their spirits up, but it would likely cost more than it would earn. On the other hand, holding a party for the nobles offers you the chance to make some powerful connections, which can result in stimulating the economy even more down the line.
As for the merchant who was working for the Stag Lord? You may want to remember that the Stolen Lands have a long history of anarchy. The Stag Lord maintained his authority through threat of violence if anybody tried to oppose him. I'm sure that at the time he was in power, the merchant decided that it would be better to sell his wares to the Stag Lord willingly and continue making an income, as opposed to denying them service, and having his thugs steal everything by force and being left destitute.
I think it would be better if they'd swapped this and the merchant trading with stag lord events. First one you get after claiming your barony is "This guy was trading with the bandit lord you just defeated what do we do". Then later on after you've had time to build buildings, probably claim the outskirts, maybe build a second city, gotten the merchant event to tell you there are merchants and people present in your barony you don't see. Then you get asked do you want to hold a fair for all or a dinner for your most wealthy. Since then your looking at more of a choice. For me though when it came up I simply didn't feel like I had enough wealthy settlers to justify holding a dinner for them as my group outnumbered them and I didn't even have a treasurer at that stage.