The paper by Dr Greg Clarke titled 'Tolkien and Theology: Believing in Fairy-Stories' explores Tolkien's particular view of fantasy and its purposes and possibilities. In it Dr Clarke writes:
In 1947, Tolkien published a very significant and revealing essay, ‘On fairy-stories’. In the essay, he explores the meaning of a way of thinking called ‘faerie’, commonly expressed in fairy tales. Tolkien is at pains to point out that most people have a very narrow and mistaken view of what such a tale is—that it is a simple made-up story containing small unreal creatures. Tolkien’s own definition is more metaphysical: a fairy-story contains events, words and ideas that are magical or fantastical, but in a serious way such that it seems real. Such a tale is marked especially by the attempt to recover from a loss. Fairy-stories could achieve at least three things: recovery, escape and consolation.
Greg Clarke's full paper and his expansion of Tolkien's three things fairy stories can achieve was reprinted in Case magazine #4 (2004). You can download it free HERE.
You can also read an excellent post from the newspaper 'Eternity' on 'The Hobbit' HERE.