Innovations do not occur in isolation. There is a system or framework in which different actors are connected to and affect each other. This chapter discusses three interrelated concepts: market failure, government failure, and the National Innovation System (NIS) and the government’s role in innovation. After defining and providing examples of market and government failure, this chapter explores how market and government failures impact innovation as well as the NIS and the government’s role in innovation. Understanding government operations, interpreting the relationship between public and private organizations, and evaluating government innovations are complex tasks. Each policy is subject to limitations and unexpected consequences. In many cases, the market fails. To correct these market failures, the government intervenes, changes, or implements a new policy or uses a tool (e.g., subsidy or tax). However, the government’s involvement in the market may lead to government failure. Therefore, fixing market and government failures is not easy, although innovations can help to fix both failures. In addition, this chapter discusses how innovative activity affects economic growth, employment, and entrepreneurship, as well as how technological innovations can enhance social welfare and living standards.