In a town based festival, some pubs may take advantage of all the possible extra clients in town, to put on non folk events if they've got the space, to get local bands to play....(Not organised by the festival)

I think that was a lot of what the OP was complaining about, and what I've found a problem - those local bands are NOT what the people attending the festival for its folk music content want to hear. But a lot of festivals attract locals for the atmosphere, or because the folk festival has been arranged to coincide with an independently organized community festival of some sort. A lot of the younger locals will expect to do some binge drinking as part of this, and the music that pubs will want to encourage that will usually be some local rock band. So you get competition for pub venues, which a session will usually lose, since, busy as it may be, it doesn't have people swilling it down the way the audience for indie-rock do.

There isn't an easy solution for this. You can't very well tell publicans to take measures to sell less booze. Sometimes it just gets to the point where the police or licencing authorities intervene, but they're as likely to simply prevent the festival going ahead at all as to try to socially engineer what happens in town venues.