Casper is on a train full of ghosts heading to the Ghost Central, with no idea of where he is as well as being completely unaware that he is a ghost himself. He gets kicked off the train and finds himself in the city of Deedstown, where he unintentionally scares a bunch of the town's citizens, which leads him to the realization that he is a ghost.
Meanwhile, a loner boy named Chris Carson, with a passionate obsession of the supernatural, has a strained relationship with his work-obsessed father Tim Carson, who is attempting to demolish the Applegate Mansion, to make way for a new renovation for the town: building a brand new mini-mall in its place. However, a group of protestors is against the demolition, as the house was confirmed to be a historical landmark. The bickering was cut short when the wrecking crew that Tim hired and protestors were terrorized by the Ghostly Trio, Stretch, Stinkie and Fatso, who are in possession of the Mansion. Chris witnessed this after seeing the group running in panic, and wants to join the Trio, but they refuse since he is only human.
Meanwhile, the train that Casper was on arrives in Ghost Central run by the evil ghoul Kibosh, where new spirits are trained to learn the proper ghost lifestyle and work to receive a haunting license. After discovering Casper's absent, Kibosh becomes furious about the idea of letting a rookie ghost being let loose without any education and forces his spineless assistant Snivel to find Casper and bring him back.
After saving Chris from detention when a gang of bullies, led by Brock attempt pull a prank by dropping a balloon full of gunk on him, but landed on the school principal instead, Chris's teacher, Sheila Fistergraff, who is leading protesters becomes outraged after she and Chris witness in the news, that Tim and the town's mayor: Johnny Hunt will proceed with the demolition project as planned, despite a series of setbacks, after the mayor threatens to dismiss Tim if he does not do the job.
Chris runs into Casper, and instantly befriends him, much to Casper's surprised to see that a human isn't afraid of him. Chris insists on teaching Casper to be a real ghost while also introducing him to the Trio. Much to the Trio's delight, they discover that Casper hasn't gone to the Ghost Central and has therefore never been educated by Kibosh, which gives them the opportunity to train Casper and prove themselves to Kibosh, so he would stop chasing them. However, they are unknowingly eavesdropped on by Snivel, who informs Kibosh of their plan, much to Kibosh's rage. Casper manages to succeed in his first lesson in going into the stealth mode (going invisible), but fails at every other lesson, leading the Trio to realize that Casper is too soft to be a terrifying ghost: he wants to be friendly, which forces them to kick him out.
After a night of waiting for his father's arrival at his school's open house, Chris gets disappointed that he never showed up as Fistergraff tries to comfort and support Chris. The next morning, Tim decides to make it up to him by spending more time with him. Chris offers to teach Casper to become a better ghost after Casper informed on what happened. Casper manages to succeed by using his powers on Brock, when Brock and his friends were teasing Chris, and so he tests his new powers by scaring away a man who attempts to rob a convenience store, and is thanked by the owner for saving his life, which gives Casper the idea to use his ghostly powers to help people. After Tim's office accidentally catches on fire by Bill Case, a professional bomber he hired to blow up the mansion, he is unable to attend the plans he made with Chris earlier, but Chris hopes Tim will remember their other plans.
After Casper and Chris set up dinner for Tim's arrival, Snivel sees Casper acting like a servant to a human and leaves to report back to Kibosh, to which Kibosh is unable to tolerate any further, and prepares to retrieve Casper himself. The Ghostly Trio discover Casper's good deeds and abduct him in attempt to save their reputation, which unfortunately ruins Chris's opportunity to have Tim meet Casper as Tim does not believe Chris, and instead leaves to visit the mayor, which leads Chris to the solution to run away, for feeling betrayed by Casper, but gets captured and locked inside the mansion by Brock and the gang, unaware that a bomb has been implanted inside by Bill.
The next morning, Kibosh arrives in Deedstown, captures The Trio, and forces Snivel to find Casper. After discovering that Chris ran away, Tim meets Casper, and they both set out to find him, with Casper assuming that he is in the Applegate Mansion, which is about to explode, so Tim hitches a ride with Fistergraff as Casper arrives at the mansion to find Chris, and try to help him escape. Tim manages to get Chris out and Casper eats the bomb, which explodes in his stomach, saving the mansion.
With Kibosh being impressed with Casper's technique, Casper informs him that the Ghostly Trio taught him how to do it, so Kibosh decides to let Trio stay and haunt, which led to The Trio returning Casper the favor by lying to Kibosh saying that they are Casper's uncles, after Kibosh informs them the importance of family, which allows Casper to stay with his "uncles" and Kibosh to leave them in peace. Chris and his father reconcile and Brock and his gang get their comeuppance when the Trio hangs them from the branches of a nearby tree. Casper decides to go with a new name: Casper the Friendly Ghost.Steve Guttenberg as Tim Carson
Lori Loughlin as Sheila Fistergraff
Rodney Dangerfield as Mayor Johnny Hunt
Michael McKean as Bill Case
Brendon Ryan Barrett as Chris Carson
Richard Moll as Principal Rabie
Shannon Chandler as Jennifer
Steven Hartman as Brock Lee
Logan Robbins as Danny
D'Juan Watts as Leon
Sherman Hemsley as Store Owner
Ben Stein as Grocer
Brian Doyle-Murray as Foreman Dave
Edie McClurg as Librarian
Roger Halston as Stan
Casper Van Dien as Bystander
Michael James McDonald as Sarcastic Protester
Jeremy Foley as Casper
James Ward as Stretch
Jess Harnell as Fatso
Bill Farmer as Stinkie
James Earl Jones as Kibosh
Pauly Shore as Snivel