Between Two Worlds

In Faerie Gold: Treasures from the Lands of Enchantment (a collection of classics for young readers), Kathryn Lindskoog and Ranelda Mack Hunsicker include a message to parents and teacher entitled "Why Do We Need Fairy Tales and Fantasy?" Here's the outline of their reasons:

1. They stimulate imagination and creativity.
2. They help readers empathize with others and develop compassion.
3. They carry readers beyond the restrictions of time and space and promote a sense of mystery and transcendence.
4. They satisfy the innate desire for communion with other living things.
5. They show how the small and powerless can triumph through perseverance and patience.
6. They awaken higher ideals without preaching.
7. They help readers envision a better society where intelligence, courage, and compassion prevail.

The classic case for fairy tales is J.R.R. Tolkien's On Fairy Stories (PDF [link fixed]). Highly recommended reading.

And here's a quote by C.S. Lewis on why he preferred fairy tales to "realism":

“By confining your child to blameless stories of child life in which nothing at all alarming ever happened, you would fail to banish the terrors, and would succeed in banishing all that can ennoble them or make them endurable. For in the fairy tales, side by side with the terrible figures, we find the immemorial comforters and protectors, the radiant ones; and the terrible figures are not merely terrible, but sublime. It would be nice if no little boy in bed, hearing or thinking he hears, a sound, were ever at all frightened. But if he is going to be frightened, I think it better that he should think of giants and dragons than merely of burglars. And I think St. George, or any bright champion in armour, is a better comfort than the idea of police.”
– “On Three Ways of Writing for Children”

(HT for the quote: Children's Hour)