Developmental psychology researchers who investigate the multifaceted nature of prejudice, shown within everyday peer interactions, emphasize the importance of creating inclusive environments for children where equity and justice are promoted. This article uses the Social Reasoning Developmental (SRD) model to explore how children and adolescents reason about social inclusion and exclusion, drawing on moral, social group, and psychological considerations. The role of bystanders in challenging social exclusion is highlighted, with a focus on promoting proactive bystander intervention to create inclusive environments. This review identifies age, group identity, group norms, intergroup contact, empathy, and theory of mind as key influences on children's and adolescents’ bystander reactions. It emphasizes that interventions promoting inclusive peer and school norms, confidence in intergroup contact, empathy, and social perspective-taking can foster inclusive environments and empower bystander action that challenges intergroup social exclusion.