The primary setting of "Greasy Lake" is Greasy Lake, a lake in the worst sort of ecological condition full of refuse and other filth. The first section of the story is set in the streets of a town and is the gateway for the characters excursion to Greasy Lake. The setting of the lake is important because it is a place in an adult world of order and rules where teens can gather in an environment where anarchy and primal lusts and impulses can reign with relative impunity and freedom. The friends of the story, who aspire to be "bad" characters, go to the lake to enjoy some of the primal anarchy and find more than they bargain for. In the midst of a horrific fight with Bobby and another group of bigger and meaner youths--really "bad" characters--the friends undergo a rite of passage, a ritual entrance into adulthood, by getting themselves beaten and their car beaten.
he narrator has an even deeper rite of passage than his friends because he dives into the filthy lake water in an effort to avoid more violence upon his person. There, he has the horror of encountering a floating bloated body, the owner of an abandoned motorcycle on the other side of the lake. Thus the narrator not only has a ritual initiation rite, he also has a baptism into an altered life: He has washed in the waters (dirty waters, not holy) and come up a new man. In this baptism though, he is not a new man because of the holiness of the water but because of the foulness of the water: He has met death and death is what awaits him as a "bad" character. Through his baptism, he rejects that life and his "bad" aspirations, having thus gained a realistic view of life. These are the reasons that the setting is so important to the story, it offers: a primal place of anarchy; a place where battle provides a rite of passage; a place of water baptism into a higher spiritual and moral plane.