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First, I suggest that geography and setting don't dictate theme and characterization as much as reflect them, although one particular detail is central to character and theme.
That detail is that Nick is from the Midwest. His values and ideas interpret the action for the reader. He is opinionated and makes value judgments about the characters. For instance, his view of Tom is certainly very much Midwestern. He is an outsider looking in at Tom's old money, lifestyle, attitudes, etc. The characterization of Tom certainly might be dictated by Nick's being from the Midwest. And, by the way, of course, what a character knows, his attitudes, etc., is part of a work's setting.
That said, the geography and setting in the work certainly reflect characterization and theme. A primary example is the setting and geography of the two Eggs. Though within sight of each other, they certainly represent two separate "worlds," figuratively speaking. This highlights the conflict between different segments of American society, generally, and the conflict between Gatsby and Tom, specifically. It also reflects the theme of the American dream. The Valley of Ashes, of course, reflects the barren nature of the Wilsons' lives, as the location of the novel--the East--contrasts with both Gatsby's and Nick's upbringings.
Again, the geography and setting reflect theme and characterization in the novel, but it might be a bit of a stretch to suggest that they actually dictate theme and characterization.
Much like James Joyce in his story "The Dead" where the West represents a journey toward death, and an area where the living are not in control, F. Scott Fitzgerald employs the West Egg to point to the separation of new money versus old (as previously mentioned) as well as suggesting that Gatsby in not in control of his life and moves toward death despite his looking toward the green light of East Egg. Certainly, with the scene in which Gatsby's car has struck Myrtle Wilson and killied her in the Valley of Ashes, the significance of setting cannot be overlooked. That George Wilson, an inhabitant of the Valley of Ashes, also dies points again to the symbolism of the dismal and moribund environment from which he comes and brings death with him to Gatsby and himself.
The setting separates the characters into classes. One of the Eggs (East/West) is old money as represented by the Buchanans, the other is new as represented by Gatsby. These are both upper class although their means to arrive there varies. The Valley of Ashes very much represents a middle class working society. That is where Wilson and Myrtle work and live. You must travel from the Eggs through the Valley of Ashes to get to New York City proper. In NYC, you have a variety of classes and dealings represented.
The setting often determines the type of action to take place as well. In NYC, deals take place, whether they are within a marriage, among business partners(Meyer Wolfsheim), among lovers(Tom and Myrtle), or just transactions from vendor to customer(Tom and Myrtle and the dog).
In the Valley of Ashes... death occurs or is derived.
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