If you're designing that setting for yourself to write stories in, then it works as long as it works for you.

If you were to ask me, then personally for my taste dying for failing tests still carries a feeling of it being a punishment rather than fun enjoyable activity. I'd rather have a setting where there are children's games and amusement rides that are designed to kill you for the fun of it. And I also prefer worlds where boys and girls are equal and it's just that the stories focus more on the girls. Like in many anime you have predominantly female characters, but they don't go out of their way to explain it by creating a world with overwhelmingly female population. They just shove most boys to the background in order to focus more on the girls just because they like girls - and they know their audience likes girls - and they don't need any other excuse to have a predominantly female cast of main characters.

I usually prefer no explanation for casual guro worlds, bringing in reason removes the crazy part from crazy fun, trying to explain how such a world functions feels like trying to dissect fun into technical parts, and fun doesn't survive a dissection very well. Like a joke is funny, an explanation of a joke is not. Returning to anime and girls, I make casual guro because I enjoy casual guro and I don't need any other excuse to have my characters casually kill themselves for fun.

But if for your enjoyment of a guro story an explanation is necessary, then I have one in mind. Basically, people live for a long time, say a 1000 years, but look and function as 20-40 for most of that time, so they have many children over the course of their life. Say, if they have on average one child every 10 years, that would make a 100 children over the course of life. So even if, say, 90 of those die before adulthood, that still leaves 10 to replace their two parents in the population.

Although in the world I imagine overpopulation isn't a concern, as resources and living space are abundant. For resources they might use fusion making everything cheep as dirt, and as for living space, even within our Solar System we have combined mass of all the planets (and Sun, really) as building material for a Dyson swarm of habitats, and if you google "McKendree cylinder" an individual habitat can have more than ten million square kilometers of land area. That's more than all of USA. And apparently that's just the size scientists are seriously considering, so if you take it a step further into theoretical limits it can go bigger than the whole continent of Eurasia.

The math above also means that as long as people are considered adult at around 20, at which point they move out and create their own families, you would see an average family have less than 2 children living with them at any given moment. So without knowing they also have five kids who are already adults and have families of their own and another 40 of their kids died so far, you would observe a world looking not very different from ours (*). Only the number of elderly people would be lower... although now that I think of it, you could just have people live another 1000 years after the end of child-bearing age and now that difference is solved too. Then again unless it's specifically mentioned you can't know if there's a very low number of elderly in the world or they're just not mentioned because they're not relevant to the story. In other words, any casual guro story that doesn't specify how its world works can be imagined to be set in this world, or some variation of it with adjusted math, or maybe just a specific part. Like a particular habitat where people prefer to live simpler life like it used to be a few thousand years ago in the XXI century.

But if overpopulation isn't a concern, why do kids kill themselves? Well, just for the fun of it, of course. That's the whole appeal. Perhaps those who don't have a particular goal they wish to dedicate their adult life to - which would be most of the kids - don't see harm in not making it to adulthood - especially seeing how most don't and it's the norm in their world. One way to think of it is that they take the joyful and fun part of life for themselves and leave the boring and tedious (adult) part to someone who's more into it. But it's not seen as egoistic, but more like leaving complicated stuff to actually competent people. Then you could have kids who have an idea of what they would do IF they survive to adulthood and maybe even expect to be successful, but don't really care if they actually do survive and get to do it or die along the way on some random party just going with the mood. On the other hand this explains why only kids die for fun left and right but once they reach adulthood they go on living as normal - because it's only people who had specific intention to go on living as normal that survive to adulthood in the first place. Not to say an adult can't occasionally kill themselves and it would be seen more acceptable than in our world, but it would be a rare occurrence.

There's also a way to link this setting to Juan Gotoh's "Graduation and Beheading Ceremony" which is what brought me into casual guro and inspired my works. Say, half the kids die throughout their school lives, and then of the remaining half a select few go on living adult lives while all the rest who don't care for it get to die in graduation. But notice again how in "Graduation and Beheading Ceremony" it's never explained why this is happening and how their world is working, it's just how it is because it's hot.

Also, now that I mentioned Juan Gotoh, this reminds me of a different variation of this setting somewhat related to their "Applicant for Death" manga, except in this setting it would be a totally legal and accepted show. So people are still living all over the Solar System in huge habitats, but their lifespan isn't very different from ours. However, let's imagine once in ten billion children there's one who genuinely enjoys dying for fun. This means on our Earth with less than ten billion people overall you might not find one, especially seeing how if there is one then soon enough there isn't. But! What if with all the extra living space the population of the Solar System is a hundred billion billion? Than in one generation you'd have a whole current Earth population of death-enjoying kids - let's call them snuffets. And if that's not enough you can set the overall population however high you want, although at some point you'd want to go interstellar. The idea though is that even if the relative number is the same, at such absolute numbers they can't be ignored as a fluke anymore and become acceptable as just a rare but still legit sexuality (of course simple pedophilia or kids themselves being sexual is long accepted by that point) or even just extravagant niche hobby that doesn't necessarily have to be sexual. So while an average person would never meet a snuffet in person due to their relative rarity, as the absolute numbers increase at some point more snuff media content (totally legal at that point) will be produced in a unit of time than can be consumed in the same time. Of course in relative numbers it would still be a drop in the sea of all the other media content, but it would mean: 1) general public will be aware of its existence even if they don't have any interest in it, making it normalized, just something you're not into like you're not into, I dunno, traditional music of the Mambwe people, or any other obscure topic you never thought about, but would not see anything special about it existing; 2) snuff shows will have to compete for attention among those who do have interest, leading to pursuing new creative and spectacular snuff methods. And that's where "Applicant for Death" comes in.

(*) okay, there'll actually be disproportionally more younger children compared to older children, assuming most die throughout childhood and teenage years and not all at once at graduation. But again, in a story that follows particular characters, or even a particular festival with a lot of kids, who's to say it's representative of the distribution among the whole population - maybe this festival is just more popular with specific age groups.

P.S. My ides focuses on kids, as that's what I prefer, but surely adjustments can be made to focus on other specific age groups.