Why did God give Israel the Law and sacrificial system while surrounded by idolatry?
God gave Israel the Law, priesthood, and sacrificial system to make them aware of His holiness and sovereignty, to prepare them for a future role amid universal pagan idolatry, and to lift them out of humanity's mainstream into covenant relationship as His favored, chosen people, a peculiar treasure above all people.
Les explains that this was something never before done: God told Israel He would give them the Law, the priesthood, and the whole system of sacrificial worship. The purpose was to make them aware of God's holiness, His sovereignty, and that He was preparing them for a future role in the midst of the pagan idolatry all around them. At that time the whole world was steeped in idolatry except the offspring of Abraham. In Exodus chapter 19, Israel encamped at the base of the mountain while Moses talked with God. God said that if they would obey His voice and keep His covenant, they would be a peculiar treasure unto Him above all people. This lifted Israel out of the mainstream of humanity and put them into covenant relationship as God's favored, chosen people.