Long John wrote:
I remember in the huge complete 1965 or 1966 bootleg box set there's a live version of "Desolation Row" being played for people who are hearing it for the first time. The audience starts laughing in the first verse and then laughs a bit louder and louder through the whole song. Very odd, but understandable as one possible response to the absurdist lyrics. Real disorienting to hear today.
Somewhat similar to the audience reaction during Dylan's live debut of 'Abandoned Love,' during his surprise appearance at a Ramblin' Jack Elliott coffeehouse gig in NYC. I'd imagine people were just giddy from seeing Dylan in the flesh, in such an intimate setting; otherwise, their laughter at the relatively personal and sober lyrics seems incongruous.
I agree with the interpretations posted above, and would also add that, while the electric set was snarling and wild, provoking perhaps a similarly bawdy response, the first half is spectrally sparse. It would take a brave soul to interrupt a performance like 'Visions Of Johanna,' even if it was nothing like they'd heard before and frightening in its departure. Of course, only with communal support could somebody challenge the electrified '66 Dylan and his gunmen.