With the impressive growth of the internet, the potential to make money has also grown. Indeed, it is now extremely common for people to make frequent purchases using the internet. The world of online gaming has also seen its popularity escalate. Many of these online environments offer the trading of items between players, either for other items or some form of virtual money. The existence of virtual trade and exchange therefore creates the conditions for a virtual economy to develop not too dissimilar to the real-life economy we see today.

The game that has, perhaps, best been able to replicate the characteristics of the 'real world' economy is the game ‘Second Life’, recently in the news for the Japanese cabinet minister that had become the first politician to setup a virtual office in the game. The internet-based virtual world lets its residents interact with each other through customisable avatars. It has seen membership sky rocket in recent years, and with it so has the potential to benefit financially. The game is based on a currency, Linden Dollars (L$), with players given the opportunity to purchase L$270 for about one real dollar. This exchange rate has been volatile as the game’s popularity itself has fluctuated. The idea of taxation has been brought in as a method of trying to control the volatility of the exchange rate. This move would see the virtual economy move closer towards a real world economy. Despite this volatility, the volume of currency traded has increased substantially over the last couple of years, as shown by the first graph.

This exchange rate opens up an intriguing business opportunity: Virtual Fund Managing. This fluctuating exchange rate could potentially be used in the same way as modern day fund managers do. The existence of banks within the virtual world means interest could be earned on savings, and if the game grew to such a level, millions of dollars could be invested for a profit in the game. Could it be possible that the L$ is incorporated as a currency into global currency markets in the future? Perhaps online interest and exchange rates could even shape future economic events and trends?

Businesses have been set up within the game, producing virtual goods and services. These have great potential for profit, however they have been criticised for turning the game into a pyramid scheme. But the profit potential has attracted the attention of big name companies such as Dell, Adidas, Sky News, MTV, and even BBC Radio One, who have all marketed products in the Second Life world. Often Big corporations use the game as a medium to try and enhance their public image and popularity. For example, Toyota has released the Scion XB (an aesthetically-challenged new model) in the game helping to advertise the car itself.

The game even has a Real Estate market, as the developers have made land scarce in the virtual world. The game itself has a mainland area, from which land gets auctioned. Prices in these auctions can reach US$4000, which is a little steep for a little patch of virtual space! The fact that people are willing to spend a tenth of their income (using average per-capita GDP among MEDCs as $41,000) shows that there is a great deal of interest in the game. If people are willing to spend such a large portion of their income on the game then there must be other products other than real estate that would enhance their playing experience. This essentially proves that there is a market out there for companies to make profits. The second graph shows how the business potential has been realised in the past year and the economic activity within the world has increased.

So far, we have only looked at the positive economic benefits and opportunities that come with virtual economies. There are, however, many negatives as well.
The real money factor of these online games has also brought with it crime. The virtual worlds allow ‘criminals’ to carry out crimes with relatively little punitive sanctions. For example, in South Korea, where online gaming is extremely popular, gangs have been emerging. These gangs have been threatening beginner players to pay money for ‘protection’. This ‘mafia’ rule is essentially stealing, however there is little legal protection for the victims. But this has been a problem for decades now; it is not something created by the virtual economy itself. Although this has not yet been linked directly to crime in the real world, there is definitely a money making opportunity for real world criminals to fund their activities through the virtual world.

If this were to become a problem, then the virtual economy could easily be classed as a demerit good. It would be creating negative externalities to third party victims of real-world crime. So theoretically the government should interfere at this point. In the virtual worlds, the developers already interfere by excluding the rule breakers and ‘gang members', effectively acting as omnipotent non-elected governments of their own little virtual space and economy. Then there are the more ethical crimes, like the brothel set up by a seventeen year old called ‘Evangeline’ in Sims Online. These crimes could be classified as negative externalities, however they have always been targeted early on in their development by the game creators.

Crime is not the only externality that the virtual worlds impose on society; there is also the problem of obsession with the games. Especially in ‘Second Life’, players (or residents as they like to call themselves) have often become very involved in the game. It has been reported that some people spend more time in the virtual world than they do outside their own house! If people are staying in and playing on virtual games, then they are not working or earning money. However, if these virtual economies can become properly incorporated into the real world economy, then perhaps this externality could be removed.

Overall, virtual economies can become an economically beneficial entity to the global economy. However, it is not clear who exactly will benefit and exactly how influential these virtual economies will become. No matter what, they will need to be strictly regulated to prevent it becoming a haven for crime and the black market. It can, however, be stopped if the crime gets out of control or starts negatively affecting the real world. Perhaps in the future it could be feasible that the real world economy and virtual economy could create a global dual economy, not unlike those seen in many LEDC’s today.