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This dissertation analyzes the interaction between governments and markets when governments have the intention to either spend or raise public funds. It is an elaboration on the role of the State albeit not in a political but economic dimension using analytical tools of economic theory. The dissertation covers two aspects of public finance: the effect of government spending and the design of revenue generation mechanisms. First, in a joint study with Antonio Afonso and Hans Peter Gruener we inquire whether the impact of government spending on GDP differs during financial crises and normal times. Second, we ask what is the optimal way for governments to raise revenue from returns to capital: controlling investments or providing incentives. And third, we consider how revenue generation is affected by skill heterogeneity across entrepreneurs.