You could have occasional open mic nights where new acts audition for a concert slot. Audiences know what to expect from an open mic. My opinion is that if you are charging people to come and watch a performance, you have a duty to put on competent performers. People who do the booking for venues have to learn to say no.

Ebbie, I don't know if this is true, but your situation may be complicated by the possibility that you are the only place in town to hear or to perform folk music. This may impose a heavier than usual requirement that you engage in artist development -- if there's only one place to play and the booker says no, there's not much option for a beginning performer. As has been suggested, events that are participatory in nature are a good place for people to play music if they aren't ready for more formal performing. I have watched (and encouraged) musicians who regularly attend song circles and open mics go from being pretty bad to being very good. That said, there are also musicians who will never achieve the minimum competence required to perform, and song circles are a great place for them to play and sing in an appropriate setting.

I usually don't tell people what I think of their performance unless they ask me, I think they can hear blunt honesty without damage, and I see the possibility of them actually getting better (I always complement where possible and criticize with a great deal of respect). I am in strong disagreement with the habit that so many folkies seem to have of praising everyone, no matter how bad they are. People who aren't ready to get on stage shouldn't get on stage, and gaining a clear idea of their own level of competence is the only way they are going to get any better, or to figure out that they should stop inflicting themselves on others. Unfortunately, people who can't work that out for themselves before they get on a stage probably won't ever work it out. A well-developed self-critical facility is essential to being a good musician. And the person doing the booking for a venue has to learn to say no.

Praising unpracticed or incompetent musicians and/or giving them a stage is also somewhat insulting to the musicians who have spent the time and dedication acquiring real skills. We really aren't all the same, and artistic achievement isn't a democracy.