Daughter has friends with new baby. They saw a bib on Etsy that has Boo from Mario on it and wanted to know if I could do.. If this is licensed and copyrighted how do people sell on Etsy.

If the bib is made from licensed fabric it's okay to make something new to sell as the royalty fees were collected by the original seller. If it is an embroidered design, then let's hope the seller purchased legal designs and has followed the licensing terms of agreement that accompanied the designs.

They didn't get caught -- yet. With all the things sold on Etsy, they often wait until someone points out the issue or threatens to sue. Some people may have paid for the rights to sell but it is very expensive so I doubt it.