To be able to distinguish people with a good character from those with a bad character. For instance, it could be used in the case of a girl/boy who always dates the wrong girls/boys etc.

Good people are those you know you can trust. Good people will help you and are honest. Bad people are ones you know will cheat you, steal from you and be untruthful. To know good from bad is to be able to see the difference between the two.

"to (recognise) good people (compared with) bad (people)"