A virtual economy (or sometimes synthetic economies) is an economic system that excists within a virtual environment, often in the context of an Internet game. Initially economies emerged as exchange systems with values that were applicable only within the confines of the game. Multiple contemporary virtual economies have produced virtual monies, goods, properties and services that have been sold or traded for "real" world monies, goods, properties and services.
These economies are observed in MUDs and massively multiplayer online role-playing games (MMORPG). The largest virtual economies are currently found in MMORPGs, such as EverQuest, Ultima Online, Dark Age of Camelot, World of Warcraft, and EVE Online. Virtual economies also exist in life simulation games such as The Sims Online, or Second Life, which has perhaps taken the most radical steps toward linking a virtual economy with the real world, such as recognizing intellectual property rights for assets created "in-world" by Second Life subscribers, and maintaining a laissez faire policy on the buying and selling of Linden Dollars (the world's official currency) for real money on 3rd party websites. They can even exist in internet games like Neopets, Tokenzone or Kingdom of Loathing where "real" money (or meat in Kingdom of Loathing's case) can be spent and user-created shops opened. Virtual economies have also been said to exist in the "metagame" worlds of live-action role-playing games.
- Persistence The software maintains a record of the state of the world and the resource possessions of the players, regardless of whether or not the game is "in session" for any user.
- Scarcity Users must expend "real" resources such as time and money to obtain goods and/or services in the synthetic world.
- Specialization Availability to players of the resources must vary.
- Trade Users must be able to transfer goods and services to and from other users.
- Property Rights The world must record which goods and services belong to which user identity, and the code must allow that user to dispose of the good or service according to whim.
These conditions of scarcity, specialization, and comparative advantage will create an economic system with properties similar to those seen in contemporary economies. Therefore, economic theory can often be used to study these virtual worlds.
Within the virtual worlds they inhabit, synthetic economies allow in-game items to be priced according to supply and demand rather than by the developer's estimate of the item's utility. These emergent economies are considered by most players to be an asset of the game, giving an extra dimension of reality to play. In classical synthetic economies, these goods were changed only for in-game currencies.
"Real" economic interaction
Often, within a game's synthetic economy, interaction with the "real" economy will occur: characters, spells, and items are sold on online auction websites like eBay for real money. These real economies are controversial, to say the least. For example, most would consider it in poor taste to offer, in a social game, one player real cash in order to play a certain way (for example, the hated "one-real-dollar-for-Boardwalk" player). They are viewed by gamers and game designers as spoilers. However, such rules of etiquette need not apply, and in practice they often don't, to massive game worlds with thousands of players who know one another only through the game system.
While some game developers, such as Blizzard (responsible for World of Warcraft), oppose and even prohibit the practice, it is common that goods and services within virtual economies will be sold on online auction sites such as eBay, traded for real currencies. Some argue that to allow in-game items to have monetary values makes these games, essentially, gambling venues.
According to standard conceptions of economic value, the goods and services of virtual economies do have a demonstrable value. Since players of these games are willing to substitute real economic resources of time and money (monthly fees) in exchange for these resources, by definition they have demonstrated utility to the user.
Some virtual world developers officially sell virtual items and currency for real-world money. For example, the MMOG There has therebucks that sell for US dollars. The currency in Project Entropia, Project Entropia Dollars, could be bought and redeemed for real-world money at a rate of 10 PED for U.S. $1. On December 14, 2004, an island in Project Entropia sold for U.S. $26,500. One gamer also purchased a virtual space station for U.S. $100,000 and plans to use it as a virtual nightclub.   One of the largest virtual economies, Lineage, is based in South Korea, claiming to have four million users.
Some have claimed that real-economic interactions within virtual economies create a game that constitutes gambling, and that these games should be regulated as such.  Others, such as The Themis Group's Richard Bartle have argued that the notion of virtual property is inherently flawed  since players do not "own", materially or intellectually, any part of the game world, and merely pay to use it. In fact, one of the dangers of investment in virtual property is that the game developer is free to change the game world at any time.
Furthermore, because "virtual property" is actually owned by the game developer, a developer who opposed real commerce of in-game currencies would have the right to destroy virtual goods as soon as they were listed on eBay or otherwise offered for real trade, though this decision would be highly controversial.
Capital in virtual economies
In these virtual economies, the value of in-game resources is frequently tied to the in-game power they confer upon the owner. This power allows the user, usually, to acquire more rare and valuable items. In this regard, in-game resources are not just tradable objects but can play the role of capital.
Players also acquire human capital as they become more powerful. Unlike in standard economies, identities, or characters can also be sold. High-level characters can be, in these worlds, the most valuable form of capital. Level 60 EverQuest characters reportedly have sold for as much as U.S.$5,000.
- World's World The Virtual Economy Game
- Castronova, Edward. "Virtual Worlds: A First-Hand Account of Market and Society on the Cyberian Frontier," CESifo Working Paper No. 618, December 2001.
- Castronova, Edward. "On Virtual Economies," CESifo Working Paper Series No. 752, July 2002.
- Castronova, Edward. "The Price of 'Man' and 'Woman': A Hedonic Pricing Model of Avatar Attributes in a Synthethic World," CESifo Working Paper Series No. 957, June 2003.
- Pitfalls of Virtual Property - A philosophical case against the concept of "virtual property" ownership.
- The Punctured Magic Circle - One game designer's viewpoint on virtual economies.
- Virtual Economies The Economist, Jan 2005, (subscription)
- Zonk (Slashdot). "Virtual Island Sells For $26,500". 
- Fairfield, Joshua, "Virtual Property" . Boston University Law Review, Vol. 85, 2005 
- MyTwoPecs.com - A site monitoring the virtual economy of Project Entropia
- Internet Gambling Regulation Present and Future - Mark Methenitis' Essay for Texas Tech University School of Law detailing internet gambling and economies within MMORPG's and the problems that will be faced in the future.
- Another MMORPG trading model than classical eBay - Why couldn't the MMORPG virtual market be like well known stock exchange models?
- Eye On MOGS - Price Comparison for the Virtual Commodities Secondary Market
- Man buys virtual space station for US$100,000