It is a baby doll that has been thrown away and can also speak. It looks very rusty.
Role in episode
While picking up trash, SpongeBob notices this baby doll in one of the trash bags. He wants to take it and keep it as a truck mascot. Squidward then volunteers to take the doll inside the truck while SpongeBob picks up the rest of the trash bags. While inside, Squidward leaves the doll at the window and lazily relaxes. But the doll then says that it wants to have fun. Squidward pokes the doll in an attempt to keep it quiet. The doll then says it wants to have good grades. Squidward responds that if it wants to have good grades, it should stop using the term "wanna." Then, the doll says that it wants to destroy Squidward which makes him panic. So he throws the doll out and runs away.
In the end, the doll shows up again and throws a can at Squidward.