Jonathan Gruber continues MIT's 14.41 Public Finance and Public Policy with a lecture on externalities, the costs or benefits that market transactions impose on people outside the transaction. He works through the standard theory of how externalities cause markets to over- or under-produce relative to the social optimum, then applies it to climate change, treating carbon emissions as a global externality problem, and to forest fires, where land management decisions by one party affect risk for others. Gruber discusses policy responses, including taxes, subsidies, and regulation, and where each tool fits the structure of a given externality. The lecture is delivered chalk-and-talk style at the whiteboard, building graphs of supply, demand, and social cost step by step, in keeping with the course's classroom recording format from MIT OpenCourseWare.