In 1947, Los Angeles, California, Toons commonly interact with the Hollywood studio system and live in a section of the city known as Toontown. Roger Rabbit is the star of "Maroon Cartoon" animated short subjects, but he has trouble following the director's commands, delaying the production. Rumors are spreading that Roger's wife Jessica has a "sugar daddy" and studio head R.K. Maroon hires private investigator Eddie Valiant to look into the matter. Eddie, whose brother Teddy was killed by a Toon five years before, reluctantly takes the job. He discovers that the buxom Jessica is "cheating" on Roger by literally playing pattycake with Marvin Acme, owner of the Acme Corporation and Toontown. Eddie reveals photographic evidence to Roger, who sinks into depression. Marvin Acme is found murdered the next day, and Roger becomes the prime suspect.
At the crime scene, Eddie is met by Judge Doom of the Toontown District Superior Court and his Toon Patrol weasel henchmen. Doom is eager to use "The Dip", a mixture of chemicals that can dissolve any Toon character on contact, on Roger once he can be found. Eddie encounters Baby Herman, Roger's co-star, who swears that Roger is innocent and that Acme's will, which would have left Toontown to the Toons, has gone missing; if the will is not found by midnight, Toontown could be sold at a public auction. Roger himself turns up at Eddie's office and pleads his innocence. Eddie begins to investigate the case deeper with his on-off girlfriend Dolores and a Toon taxicab named Benny while trying to keep Roger hidden from the Toon Patrol. Valiant discovers that Jessica was forced by Maroon to get close to Acme or else he would have ruined Roger's career. Maroon himself admits that he was forced into blackmail by another person, but before he can reveal who it was to Eddie, he is fatally shot by an unknown shooter.
Eddie sees Jessica fleeing from the studio and, overcoming his anxiety, pursues her into Toontown. He recovers the gun that killed Maroon, which Jessica claims was actually used by Judge Doom. As they attempt to bring Doom to the authorities, Eddie, Jessica and Roger are all captured by the Toon Patrol and taken to the Acme warehouse. Doom reveals his plans: as the sole stockholder in Cloverleaf Industries, he bought the Red Car and he plans to buy Toontown, the Acme Company, and Maroon Studios, and then raze them to make way for a freeway for Los Angeles. To wipe out Toontown, Doom has built a vehicle with a large Dip vat that he plans to spray throughout the district, wiping out all the Toons. As Roger and Jessica struggle to avoid being hit by the spray of Dip, Eddie manages to get free and causes the weasels of the Toon Patrol to die of laughter through various comedic antics, leaving the Dip sprayer running automatically.
Eddie and Doom then fight, using assorted Toon props found within the factory, until Eddie is able to run Doom over with a road roller. The crushing does not kill Doom; instead, Doom reveals himself to be a Toon, the same one that killed Eddie's brother. Eddie manages to open the drain on the Dip sprayer, showering Doom with the mixture and dissolving him. Eddie frees Roger and Jessica, their relationship having been mended, while the Dip sprayer harmlessly crashes through the warehouse wall into Toontown and immediately smashed by a Toon train. As numerous Toons enter the warehouse to see what the commotion is, Eddie discovers Acme's will written in disappearing/reappearing ink on an apparent blank piece of paper that Acme had given to Jessica that Roger later wrote a love poem to his wife on. With the will in hand, the Toons celebrate their ownership of Toontown and sing "Smile, Darn Ya, Smile" while Roger and Jessica as well as Eddie and Dolores rekindle their relationships.