"The Lottery" is set in a small farming village, somewhere reasonably isolated from other villages. The people living there focus on their yearly harvest to see them through the winter, and ever since the village was founded take part in a ritualistic Lottery that picks one person to be sacrificed in honor of the harvest.
The village is not greatly described, except in brief snippets; it seems to be a typical rural farming village, with communal activities and every person directly associated in some way with village events.
...the flowers were blossoming profusely and the grass was richly green. The people of the village began to gather in the square, between the post office and the bank, around ten o'clock...
(Jackson, "The Lottery," classicshorts.com)
This innocuous place is like many other villages around it. The anonymity of the village adds to its menace, as it could be any place in the country, even right next door to the reader's hometown. By using a sort of "Everyplace USA" setting, the author demonstrates that innocent exteriors can sometimes hide terrible secrets.
The setting of "The Lottery" is, according to Shirley Jackson, her village of Bennington, Vermont:
“I suppose I hoped, by setting a particularly brutal ancient rite in the present and in my own village, to shock the story’s readers with a graphic dramatization of the pointless violence and general inhumanity in their own lives.”
Oddly enough, some of the readers of The New Yorker, in which "The Lottery" was first published, also wanted to know where such lotteries were held so they could visit this area and watch. This fact seems to underscore Jackson's theme of the human propensity for violence as a trait in some people, a trait exemplified by Mrs. Delacroix, who has been friendly with Tessie Hutchinson, but when Tessie draws her lot as the village scapegoat, she eagerly lifts the heaviest rock she can carry.
In her story, Jackson's village is a rural area, surrounded by other such villages with people who have lived narrow lives and, perhaps as a result of such lives, appear to have narrow minds, as well. Thus, Jackson's parable also points to a phrase used by Ralph Waldo Emerson: "the opium of custom." For, the villagers, especially Old Man Warner, continue the lottery simply because they have always had one.