I agree with Johnny J, I think there's room for both types of event but problems can arise when there's a mismatch of expectations. I don't think the fact that the audience is paying matters so much as what they think they are paying for. If they are paying to be entertained, then the event has a duty to put on performers who reach at least a minimum standard. However it's different if the audience is paying to participate in an event where everyone is encouraged to perform, where mere participation may be more important than quality.

What is important is to be clear to both audience and would-be performers what sort of event it is, and what is is expected of both of them.