Awkward Situation

At the beginning of the semester, we talked about how people have become accustomed to describing people by color, not by personality traits or other looks. We also talked about how some people, whether they are white or not, get incredibly offended by describing someone only by color.
I got a text message last week from a co-worker. To be anonymous, we'll call him Steve. His message read (other names also protected by anonymity), "Wow, Chris (a white employee) just said n----- in front of Jeff (a black employee.) It was really awkward for me because I was standing in between them. Jeff either didn't hear him, or acted like he didn't hear him, but I left to do something else anyways."
There are a few things that stick out about this situation. On one side, I know that Chris lives with two of his black friends. When they are together, everyone's okay with everyone using that term. So on that end, I can see how Chris doesn't think of it as anything out of the ordinary, and if you met Chris, you probably wouldn't think it was out of the ordinary by all that much either.
On the other hand, and far more importantly, the rest of us were offended by his remarks. Just to think, if we were offended, who knows what Jeff is thinking. We don't really know him that well because he just started working there in October, and he's a pretty quiet guy so we don't have any idea what he is or isn't okay with hearing. I have tried to talk to him about several subjects, and he is beginning to open up. I know that the best thing is to get him to feel comfortable working there, and hopefully we can work past Chris's comments without having to talk about the whole thing with Jeff.
These kind of situations happen all the time, especially in the media. The best outcomes for them are when people are chastized for making racial slurs and have to pay the consequences. On an episode of South Park, one of the characters goes on "Wheel of Fortune." He makes the final round, where he gets the category of "People Who Annoy You." After he gets his four consonants and a vowel, the board reads "N_GGERS." The crowd is silent after he gives his answer (take a guess at what that was) and sees the correct answer, "NAGGERS." He gets booed off the stage and everyone hates him afterwards, especially his kids. So maybe if there's the message out that making racial slurs is the embarassing thing to do, less people will do it.