This lecture covers the concept of innovation policy, focusing on addressing market failures to incentivize potential innovators. It discusses the rationale behind innovation policy, policy instruments such as lowering innovation costs and addressing innovator's revenues, and the role of patents and prizes. The lecture also explores the impact of R&D spending, spillovers, and different types of innovations in healthcare. It analyzes market failures in various innovation scenarios and the policy responses to overcome them, emphasizing the importance of directing innovations towards socially beneficial domains.