What does George think will happen to Lennie at first? What punishment does Candy say Curley will want for Lennie?
George immediately realizes how serious this is, and how Lennie's life is in danger. In those days, in that rural area of California, that's what was done - they didn't call the police, they took care of it themselves. So he tries to rationalize his way out of it - Lennie didn't do it out of meanness, so he suggests just putting him in jail. Candy, as pohnpei writes above, knows the real score: Lennie is going to be killed by the posse. He also tells George that putting Lennie in jail, in a cage, is no good either, suggesting that it might be worse than death.
I assume that you are talking about what happens in Chapter 5 after George has been shown the body of Curley's wife. Lennie has killed her and George and Candy are talking about what will happen next.
George tries to tell himself that it will be okay. He says that maybe they will lock Lennie up and then be nice to him. But Candy is more realistic. He knows what kind of a man Curley is. He says that Curley is going to want to lynch Lennie. Once Candy says that, George realizes that Candy is right.