While the basic setting of Nathaniel Hawthorne's "The Ambitious Guest" is, indeed, a notch in the White Hills of Massachusetts, there is much more to say in order to truly comprehend the setting Hawthorne presents to the reader. Other information, including time of year and geographical distance from established civilization, contribute to the setting as well.
First and foremost, the notch in the White Hills occupied by the small cottage posits the family that lives there as at the mercy of the geography and elements around them. To stay warm, the family collects "driftwood of mountain streams, the dry cones of the pine, and the splintered ruins of great trees that had come crashing down the precipice." All around them are water, rocks, and trees, which erode/ shift/ weigh down the hills around to create a precarious living situation. Add to that the great winds that come down across the hills, and it's clear the family lives under constant threat of being killed or buried alive by a landslide.
Secondly, the story begins on a night in September. Upon first glance, this may seem like an insignificant detail, but Hawthorne is a master of subtly weaving significance into his settings. September falls at a specific time of the year, particularly in the area about which Hawthorne is writing. It marks the end of the harvest. Summer has gone, and the leaves have started to die for the winter, making way for "pitilessly cold," harsh New England winters. Further, winter is often seen to represent death. Hawthorne utilizes this metaphor to show a family living at the edge of death, albeit happily.
The faces of the father and mother had a sober gladness; the children laughed; the eldest daughter was the image of Happiness at seventeen; and the aged grandmother, who sat knitting in the warmest place, was the image of Happiness grown old. They had found the "herb, heart's-ease," in the bleakest spot of all New England.
This excerpt lends itself to a deeper understanding of Hawthorne's aforementioned use of pine cones, as pine trees stay green and flourish throughout the year—even through winter. Similarly, even though death surrounds them at all times, the family lives happily at the start of the story.
Finally, the family occupies an interesting position in which they are both part of a larger community and isolated from it:
Though they dwelt in such a solitude, these people held daily converse with the world. The romantic pass of the Notch is a great artery, through which the life-blood of internal commerce is continually throbbing between Maine, on one side, and the Green Mountains and the shores of the St. Lawrence, on the other.
In short, the family shares interactions with the greater world, but exists as separate from it as well. Their cottage's proximity to the main route through the Notch allows them to experience a small part of the greater world but, like the seasons and surrounding landscape, these connections are fleeting and eventually give way.
In "The Ambitious Guest," Hawthorne presents a character who is, by his own claims, full of potential. The above family, too, contains a great deal of potential within their ranks, from the "Happiness grown old" grandmother to the youngest children, full of mirth. Like the potential of the guest, the family is unable to realize its full potential before Hawthorne sends the hills crashing down upon them.