From what I recall, it doesn't kill anyone that drinks it. It just kills the wimps that think they are strong enough to handle it.
Isn't Crusher the one that regularly drinks Dragon's Breath without any (obvious) issues?

What JMich said. Not everyone who drinks the stuff dies. In QFG V, the hero can drink it when it's offered at the Dead Parrot as a special. As for why anyone would make it, I imagine it's a bit akin to offering highly spicy food for sale that can cause extreme pain in people with lower tolerances (except more likely to flat out kill you).

Yeah I figure he stocks it to sell to Goons, but he's unscrupulous enough to sell to anyone else dumb enough to drink it.

Only Crusher. According to the sheriff, not even Otto can drink it.

Maybe the creator was trying to pull a prank?

I have seen this sort of thing in a couple other games.

In Space Quest (1 IIRC), there's a slot machine that can kill you. (I never played this game, but I watched my dad play it.)

In Lennus 2 (the game I am playing now), there is a bar where you can get exploding crackers, which take off half of the party's HP if you decide to order some.

(There are probably other examples, as well.)

I assume there are other goons around, unless you think the town actually has a population of less than 20.

I think the slot machine only kills you if you run out of money. Some games do things like that, where if you do something that would make the game unwinnable, the game finds a way to mercifully kill you, so that you don't wander around forever never being able to do anything.

That's why it's the most expensive drink, and he collects the money up front.