What you are proposing would limit folk music, not expand it.

At present, festivals put on performers from all around the country, and even from overseas. Why should a performer travel all the way to Baltimore from California, or the UK, at their own expense? Especially as they'll be too busy trying to find smaller gigs to earn a living, since you've cut off their income from festivals.

The sort of festivals you are advocating would have to rely on the same network of local performers who could afford to attend without incurring substantial travelling expenses. The range of music audiences would be able to listen to would be drastically reduced, not expanded.