How do the setting and characters contrast with what happens in the plot of "The Lottery"?
The detached, objective narrator in Jackson's "The Lottery" reveals only certain details of the setting and characters, and the details revealed seem normal and nonthreatening.
Look at how the story begins:
The morning of June 27th was clear and sunny [not dark and dreary or stormy], with the fresh warmth [not deathly cold] of a full summer day [summer, not the dead of winter]; the flowers were blossoming profusely and the grass was richly green [life everywhere]. The people of the village began to gather in the square, between the post office and the bank [a normal town], around ten o'clock; in some towns there were so many people that the lottery took two days and had to be started on June 26th [everybody's doing it], but in this village, where there were only about three hundred people, the whole lottery took less than two hours, so it could begin at ten o'clock in the morning and still be through in time to allow the villagers to get home for noon dinner [nice and easy].
This is not a Poe story in which the reader knows the horror is coming!
The narrator leads the reader along this same narrative path right up until the true nature of the lottery is revealed. The contrast is great, of course, and leads to the horror of the surprise ending.
The contrast between what happens in the story and the way the setting and characters appear is what makes this such a horror story.
In the story, the village seems so nice and so do the people. It seems like the classic place that we think of when we think of early America -- a small town with good values and strong traditions.
Now contrast that with what happens. All these nice people just go ahead and kill one of their fellow villagers just because it is traditional.
So, the contrast is between a seemingly idyllic village with nice villagers and this horrible thing that they are all doing to Mrs. Hutchinson.