The characters all live in a small town called Lark Creek and, except for when Jess goes to Washington, D.C., with Miss Edmunds, all the action takes place there. Lark Creek is a small, almost backward town in Virginia where people are slow to accept change and frown on difference (see "Character Analysis: Miss Edmunds" for more on this). They don't like hippies or girls who wear pants. People live on farms, work hard, and struggle. They don't have many resources and people, even children, are supposed to make do with the little they've got.
In a way, that's how Terabithia is – Leslie and Jess making do with what they've got. They've got a rope swing, a creek, a patch of forest, and a grove, which we know doesn't sound like much. But gosh, they do have something worth so much more than what the other characters in the book possess – real, exciting imagination, imagination so powerful that it almost seems like magic. Magic turns the creek into a boundary between realms, the grove into a sacred place, a puppy into a prince, and two fifth graders into a king and queen. We don't see that much of Terabithia, but we know it's a setting for court ceremonies, battles, and imaginative progress. And it's part of Lark Creek. Jess tells us that ideas and morals from Terabithia bleed over into regular life in Lark Creek and, by the end of the book, we see him formalize the connections between the two regions, physically linking them by building a bridge. (For more on this, see "What's Up With the Title?" and "What's Up With the Ending?")