Ed, Edd 'n' Eddy most likely live in Georgia. Towards the very end, because of The Kanker Sisters' meddling with Edd's invention, the Eds are seen falling down back to Earth; right in the lower East Coast of the United States .
Sarah's characterisation is slightly different than how she is later in the series. In later episodes she would wait for Jimmy to play with her instead of forcing Ed to do so.
Ed's parents pay Ed to babysit Sarah here. Later in the series they're more likely to force him to look after her for free.