In Paul's Case, What fantasy does he have as the orchestra warms up and people take their seats, and what spoils his fantasy? Why?

Paul fantasizes about a world of beauty and elegance.  As the orchestra warms up, he endulges in the sights and sounds of the concert hall:

When the symphony began Paul sank into one of the rear seats with a long sigh of relief, and lost himself as he had done before the Rico. It was not that symphonies, as such, meant anything in particular to Paul, but the first sigh of the instruments seemed to free some hilarious spirit within him; something that struggled there like the Genius in the bottle found by the Arab fisherman. He felt a sudden zest of life; the lights danced before his eyes and the concert hall blazed into unimaginable splendour.

It's important to note that music itself had no charm for Paul; what he loves is the grand scene, the beautiful clothes, the spectacle of the concert. He is an artist in his own way -- but his art lies not in painting or music, but simply in looking. He is a master appreciator.

That's why when his English teacher shows up at the concert, and Paul has to seat her, it punctures his fantasy a bit. Earlier in the story, we learn of an episode Paul had with this teacher:

Once, when he had been making a synopsis of a paragraph at the blackboard, his English teacher had stepped to his side and attempted to guide his hand. Paul had started back with a shudder, and thrust his hands violently behind him. The astonished woman could scarcely have been more hurt and embarrassed had he struck at her. The insult was so involuntary and definitely personal as to be unforgettable.

Just as in the case of Paul's revulsion at his teacher's touch, the teacher's presence in the concert hall is another invasion of his personal space. They are both embarrassed when they recognize each other, but Paul does seat her, thinking to himself that she must have been given the tickets; looking at her clothes, he thinks that she "must be a fool to sit downstairs in such togs." It is as if he teacher's presence is a flaw, a mistake, a element of vulgarity in an otherwise elegant picture.