Plasma electric oxidation (PEO) is a promising surface treatment technology. PEO can generate a ceramic coating on magnesium alloy, improving its wear resistance. However, the cracks that appear during the Plasma electric oxidation melting and cooling coating formation process will affect the strength, toughness and wear properties of the coating. This work includes the incorporation of varying concentrations of Y(NO3)3 into the zirconium salt electrolyte, resulting in the in-situ synthesis of Y2O3 stabilized ZrO2 on the magnesium alloy substrate via PEO technology, which generates a YSZ/MgO coating. Y(NO3)3was added to the zirconium salt electrolyte, and an YSZ/MgO composite coating was prepared by plasma electric oxidation. The coating layer is mainly composed of MgO, t-ZrO2, Y2O3 and other phases. Compared with the Plasma electric oxidation coating that does not contain yttrium salts, the surface pores of the yttrium-containing Plasma electric oxidation coating are smaller in size, evenly distributed, and have good compactness; especially when the Y(NO3)3 content is 3g/L, the void ratio is the lowest, 10%. At the same time, the Y2O3 stabilized t-ZrO2 synthesized in situ by Plasma electric oxidation undergoes phase change in the temperature discharge channel and produces volume expansion, which causes cracks to initiate at the zirconium oxide interface and hinders the crack expansion at the crack tip, thereby achieving self-healing of coating cracks. Crack density is decreased and friction coefficient is 48% lower than typical coating. Studies have shown that the Y2O3 stabilized t-ZrO2 synthesized in situ can self-repair cracks during the coating preparation process and effectively reduce the friction system, improving the surface wear performance of the YSZ/MgO coating.