The volcano suddenly erupted during "Sponge-Cano!" but besides that the only other time that it erupted in ancient times and the only survivor was the Dolphin Warrior, as he was the only one who knew how to stop it.
When the volcano erupted, the citizens of Bikini Bottom wanted to know how to put a stop to it. The Dolphin Warrior then says that a sacrifice must be made to the volcano. It seems that the sacrifice must be the most miserable person in Bikini Bottom. The citizens then decide whoever is the most miserable until they overhear a complaining Squidward calling the town dumb. The citizens then carry Squidward to the volcano preparing to throw him in. However, they are stopped by SpongeBob who will actually become the sacrifice instead. The citizens let Squidward go and he says for SpongeBob to jump into the volcano until he trips in hanging on a rock. He bursts out saying he loves the life he is living and then SpongeBob saves him. Suddenly then, Squidward's House flies to the top of the volcano and plugs it up saving the town. The Dolphin Warrior says the sacrifice is actually the most miserable person's house. He then flies off with the volcano still plugged up.
However, in real-life, underwater eruptions would create islands and sometimes make tidal waves (known as tsunamis), but when Mt. Bikini Bottom erupted, it didn't make islands or cause tidal waves.
Plankton does not appear in this episode, and the volcano is in the spot across the street from the Krusty Krab where the Chum Bucket is usually located.