A standard roleplaying environment: the tavern. This is another easy one to create in your own home, providing you have a large enough group of roleplaying friends. Let us assume your PC group is no larger than five, and that the rest of your friends can be NPCs. Let us also aim for an exceptionally seedy and unscrupulous city tavern.
In a good LARP it is desirable to separate the players out individually at some stage, because they are more suggestible and afraid when they are alone. Some form of individual challenge is probably the best way of doing this. One possible setting for this is a cave system, and it is probably one of the easiest to recreate realistically, and one of the most perfect for playing on fears of claustrophobia and darkness.
Perhaps those that practice elemental magic begin to take on characteristics associated with their chosen element. For instance, an earth elementalist might be prone to agoraphobia, while air and possibly fire elementalists might have problems with claustrophobia. Water elementalists might always seek the path of least resistance. A fire elementalist might have a cat's opinion of water. This could also apply to physical differences. Fire elementalists might have a freakishly high metabolism and a permanently high body temperature. Water elementalists would probably never get dehydrated, but might slow down a lot when it's cold. Etc, etc.