Background: Pediatric parapneumonic effusion (PPE) remains a significant clinical challenge, with rising incidence and evolving therapeutic strategies. This review provides a comprehensive update on the pathophysiology, diagnostic advancements, and current treatment paradigms for PPE in children. Early and accurate diagnosis is essential to prevent complications, and recent innovations in imaging modalities and biomarker analysis have enhanced diagnostic precision. This article explores the role of ultrasound and computed tomography in assessing effusion severity, alongside the utility of inflammatory biomarkers like procalcitonin and C-reactive protein. Therapeutically, the management of PPE has shifted towards a more tailored approach, balancing antibiotic therapy, thoracentesis, and surgical interventions such as video-assisted thoracoscopic surgery (VATS). Emerging evidence supporting fibrinolytics and novel drainage techniques is also discussed. Additionally, we highlight ongoing research into immunological mechanisms and the potential of targeted therapies. By synthesizing recent findings, this review aims to guide clinicians towards evidence-based strategies for improved outcomes in pediatric PPE management.