The Carnival is a place where all godchildren who want to run away from home end up.
The Carnival is a run down, dirty place that has bad entertainers, gross food and even worse, dangerous rides that are literally falling apart. This includes a collapsing Ferris Wheel, a roller coaster that launches its cars off the track, and concession stands that sell candied cockroaches and rabid possums on a stick. The rides are held by apparently duct tape which doesn't seem to help hold the rides up very much.
The Carnival resembles a circus, but "without child labor laws, and much more dangerous" (as described by Cosmo) There are a number of different acts including a clown that makes horribly misshapen balloon animals, a bearded lady, and a midget wrestling a bear.
Timmy runs away to this place after he overhears an out-of-context comment by his parents that they wish they didn't have any children like the Dinklebergs (they were just saying a quote they know they will never say due to Timmy being really important to them). Feeling unwanted, he wishes himself here away from home so that he can run away, but quickly becomes overwhelmed by the odd jobs the Carnies have him doing, so Timmy wishes that he was the best Carny ever. He upstages all the other Carnies in their acts, and soon enough he believes that he is better living here. This caused Cosmo and Wanda to abandon him as they believe he isn't miserable anymore now that he is a great carny (they didn't really as they just did this as part of their plan to get Timmy to return home). Things become worse as the carnies turn on him due to them being angry at Timmy for upstaging them. They then chase him away from the Carnival. With Cosmo and Wanda's help, Timmy ends up back home where his fairies reveal that the Carnies are actually fairies themselves (except the Alligator Man who goes back to the bayou), who were helping Cosmo and Wanda convince Timmy to return home.