No one is "robbed" to enter a festival. It's a free transaction - if they don't feel the entry charge is value for money they don't have to go in. If they can't afford it, here in the UK at least there are plenty of opportunities to hear folk music for free - just go to any pub where there is a singaround or tune session. Of course, you might have to buy a pint, but you don't like paying for beer either, do you?

If CDs cost more at a festival than outside, then don't buy them.

Having a "place to play out back, in front parlor, then downstairs" is not a festival as I understand it. Events like that needn't cost a lot to organise. Even so, there are expenses involved which you seem to ignore. Even if you are only offering the musicians food, that has to be paid for. If the food is brought by visitors, doesn't that constitute a sort of entry fee, so it's not actually free?

You'll still need a licence from the performing rights societies, and in the UK you'll need an event licence. That may require you to incur costs for security, preventing noise and nuisance.

You should have insurance, in case someone gets injured and sues you.