Jonathan Gruber opens MIT's Public Finance and Public Policy course with the theoretical foundations of externalities, the costs or benefits a market transaction imposes on parties outside it. Gruber structures the 77 minute lecture around three areas where externalities matter for policy: public goods, social insurance, and taxation. He works through the standard economic model of why markets fail to account for externalities on their own, setting up the case for government intervention that the rest of the course will test against real programs. The lecture is chalkboard and slide based, delivered to an MIT classroom as part of course 14.41, and builds directly on foundational public finance concepts before applying them to specific policy areas in later sessions. It is squarely an introductory theory lecture, heavy on graphs and definitions rather than case studies.