The consequences of your choice won't become clear until much later, as much as 10 or 12 hours in gameplay time. If you decide to let the elves and dwarves have the weapons, you'll eventually discover that they are using them against innocent civilians in their insurgency. Even worse, they kill an important non-player character, and his death removes a plotline and quests from the game. However, if you decide to kill the elves and dwarves, you'll eventually discover that their deaths sparked an investigation by the authorities. It turns out that you inadvertently are the cause of the insurgency's downfall, as the authorities identify the remaining rebel members and ringleaders, including another important NPC. His removal from the game denies you his plotline and quests. Note that there's no "good" option here; in either case, someone important to you is going to die. And the outcomes aren't something that you could have predicted, either. Over the course of the game, the consequences of your choices begin to cascade, and the state of the world can change wildly depending on your decisions.
