"The people who sell food, provide venues etc often pay for the privilege and thus provide financial support for the festival."

Also, many companies will also sponsor festivals or provide services at reduced rates. Yes, even free on some occasions e.g. PA equipment, perhaps?
What about volunteer stewards, organisers etc? According to Lizzie's argument, then they should be paid too?

Of course, not all festivals necessarily engage the services of outside catering either. Many do it for themselves with volunteers etc. So, it's just a case of breaking even.

As as been stated, nobody is forcing the acts to take part and I'm sure most of them enjoy the experience. It's also an ideal environment, I'd imagine, to collaborate with other musicians, try out new line ups, or even form "scratch bands" for the occasions. This would be less feasible in an organised commercial festival.

I have no knowledge of this festival personally but there is one held in Lossiemouth, Scotland every year which operates on a similar basis although there isn't an official bill as such. However, many many musicians and bands have just turned up to perform over the years. It's held within The Beach Bar and, yes, they make money but the are also providing the venue for free while supporting music throughout the years.