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While I fundamentally agree with #2, I think we can call bad settings, themes, points of view, and plots cliched settings, themes, points of view, and plots. On the other hand, cliched writing can also be overcome by some area of genius. "Troilus and cressida" was a cliched plot, but Chaucer and Shakespeare both made masterpieces out of it.
I don't think there is a definitive answer for your question. As the old saying goes, it's all "in the eye of the beholder." I suppose you could say that a bad setting would be to place knights in shining armor on Jupiter or Mars. What is a bad plot? It could be a story that is missing an important element, like a beginning or a middle or an end. Or it could simply be a story that completely bores you. A bad theme? Can there be a bad theme? Is there anything we can't or won't write about?
A better question would be "What characterizes great literature?"
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