Demand and supply in the public sector

Market economies are characterized by the public protection of private property rights. In such economies, goods can be alienated only on the basis of mutual agreement between proprietors. Usually such alienation involves exchange between suppliers and demanders, where suppliers are households that want to sell certain economic goods at a certain price and demanders are households that want to purchase certain economic goods at a certain price. The exchange decision is a contract that specifies quantities and sums of money to be transferred. The term ‘market mechanism’ is commonly used to denote the rule that relates the result of a contract or a set of contracts to the characteristics of demand and supply.

However, many households in market economies consist of more than a single individual. As far as the private sector is concerned, one can think of business corporations, families, foundations and associations. As far as the public sector is concerned, one can think of governments and incorporated public agencies. Since such a collective houshold can own property, it needs a mechanism of internal coordination in order to express its demand or supply in markets.

The term ‘budget mechanism’ is commonly used to denote the rule that relates the characteristics of demand or supply by a collective houshold to the preferences of its members. Note that the budget mechanism is not an alternative for the market mechanism, but rather a necessary complement to it for the case a household comprises more than a single individual.