They include:.
1) The provision for social goods, or the process by which total resources use is divided between private and social goods and which chooses the mix of social goods. This provision is called the allocation function of budget policy. .
2) Adjustment of the distribution of income and wealth to ensure conformance with what society considers a fair or just state of distribution; this referred to as distribution function.
3) The use of budget policy as a means of maintaining high employment, a reasonable degree of price stability, and an appropriate rate of economic growth are referred to as stabilization function.
B. THE ALLOCATION FUNCTION.
The allocation function deals with the proposition that social - or public - goods are distinct from private goods in that the social goods cannot be provided through the market system, i.e., by transactions between individual consumers and producers.
1. Social Goods & Market Failure.
The need for social (public) goods is felt collectively whereas that for private goods is felt individually. While peoples" preferences are influenced by their social environment, wants and preferences are experienced by individuals and not by society as a whole. .
Example: - My and other people consumption of a certain good - like a sandwich - stand in a rival relationship. .
- But if a given improvement in air quality is obtained by considering new measures to reduce pollution, the resulting gain will be available to all who breathe. Consumption of such products by various individuals is nonrival in the sense that one person's partaking of benefits does not reduce the benefits available to others.
The market mechanism is well suited for the provision of private goods. It is based on exchange, and exchange can occur only where there is an exclusive title to the property, which is to be exchanged. .
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The market system may be viewed as a giant auction where consumers bid for products and producers sell to the highest bidders.