A penal colony is a colony used to house prisoners. The British Empire's use of parts of Australia provides a classic example.

Prisoners were sent far away to discourage escape (or even return after sentence-expiry), and to places otherwise inhospitable where their (unpaid) labour could rebound to the metropole's advantage before later bulk "free" immigration became viable. In this way, the British got rid of criminals and prostitutes by shipping them to North America as indentured servants. When that avenue closed in the 1780s after the American Revolution, Britain switched the destination to what later became parts of Australia: Norfolk Island, Van Diemen's Land and New South Wales. Awkward advocates of Irish Home Rule or of Trade Unionism (the Tolpuddle Martyrs) received sentences of transportation and joined the thieves and embezzlers and prostitutes in remote Australian colonies.

France elected to send serious criminals to uncomfortable tropical penal colonies: Devil's Island in French Guiana received forgers and other criminals; for a time New Caledonia received dissidents like the Communards.

Both Imperial Russia and the Soviet Union used Siberia as a dumping-ground penal colony for both criminals and dissidents. Though geographically contiguous with heartland Russia, Siberia provided both remoteness and an unwelcomingly harsh climate. The Gulag and its predecessor, katorga system, developed forestry, logging and mining industries, construction enterprises, as well as highways and railroads across Siberia.

The idea of remote and inhospitable prison planets has also understandably appealed to science fiction writers. Some of the most famous examples include Salusa Secundus in Frank Herbert's Dune, and the penal colony in Alien 3, though many more exist. In the Star Trek universe, Rura Penthe is a Klingon colony where prisoners mine dilithium.

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In the Penal Colony is a short story by Franz Kafka.