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Granddad: Y'all need to start appreciating your granddaddy. I went and spent your inheritance on this beautiful house in this neighborhood and all I ask you to do is act like you got some class!
Riley: (to Huey) Hey...what's "class"?
Huey: It means, "don't act like niggas."
Granddad: S-s-s-see? That's what I'm talkin' about right there! We don't use the "n-word" in this house!
Huey: Granddad, you said the word "nigga" 46 times yesterday. I counted!
Granddad: Nigga, hush!

Ethnic slurs are wrong. They are used as a way to imply that a whole group of people is inferior to another group in some way(s). Yet somehow, it got to be that ethnic slurs are just wrong if they are spoken by people other than the group the slur is about. (Another aspect of the Double Standard: the "W-word" and "G-word", whitey and gringo, though clearly slurs, were until recently freely usable by anyone without getting called on it. Allegations (albeit unfounded ones) that American President Barack Obama's wife may have used the former is one of the first times it's ever been indicated that a black person might not have "W-word privileges".)

The most notable form is the word "nigger", which then became a term of fellowship in American hip-hop culture. Yet that fellowship only extends to those who have been accorded N Word Privileges. So who has N Word Privileges?

Current rules appear to be as follows in the country of its most predominant usage, the United States of America:
  • Those a part of the ethnic group to whom the term originally applies usually get a free pass.
  • Those a part of an ethnic group who have also historically experienced racial discrimination sometimes get an honorary pass, but pains must be taken to not appear as part of the out-group when using it.
  • Those a part of an ethnic group who have not historically experienced racial discrimination or have been folded into the group who have not historically experienced racial discrimination can exercise N Word Privileges only if their honorary in-group status is unquestionable to every single person within earshot. (And sometimes not even then.)

Another aspect of this trope is that if a person outside the group says an ethnic slur, that person is aware that it is wrong, or will soon accept that it is wrong, then later apologize for it. (This applies to clinical discussions of offensive terms.) Otherwise, it's just plain old prejudice. Thus when Draco Malfoy and Voldemort say "Mudblood" it doesn't count as this, because they never accept that it's wrong. (This applies bigots in Real Life, as well.)

Because whites as an ethnic group have not experienced racial discrimination (at least in history recent enough to be considered relevant) as almost every other ethnicity in the U.S., it is worth noting that most white people don't have N Word Privileges at all, even so far as calling other whites "whitey" or "gringo", etc. However, N Word Privileges do not just encompass ethnic slurs but religious ones as well, and these religious slurs are perhaps the only time whites are counted as part of an "in-group" with N Word Privileges.

Many people (of all ethnicities) find this trope problematic. Those belonging to the in-group wonder if they can really "reclaim" a word with such a loaded history, or the point in doing it at all. Those belonging in the out-group feel bereft at not having every single possible word in the English language at their disposal (not that they'd ever use it, mind, but Its The Principle Of The Thing).

The title of this trope comes from Chris Rock's expanation of why white people can't say the N word. "Well, the thing is, you used to use it all the time. Got a little uppity with it, you might say. So your N-word privileges have been revoked."

The same phenomenon can be applied to non-ethnic terms as well, usually terms for various disabilities (crip, gimp, spaz, etc.) or for sexual orientation/identity minorities (fag, queer, tranny, etc.). The general idea is to resist the euphemism treadmill—thus implying that no euphemisms are needed because the concepts that would usually be referred to by "polite" words are not inherently shameful and do not need to be hidden.

Also see T-Word Euphemism, which this page demonstrates.

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