Hi Annie,
Thanks for your patience while I looked into your problem. First of all, let me tell you that the problem you budgie has is not one that is caused by something you did or didn't do. Since it is a young bird, it may very well have had the problem when you brought him home.
Your little budgie almost certainly has what is known as scaly face. This is caused by burrowing mites, Knemidokoptes ssp. or Knemidokoptes mutans, which burrows into the ceres and feet and legs. It causes terrible itching, redness, flaking, and can actually cause the little bird's beak, face, and legs to become deformed.
Images available only to Customers.
This photo, found at burgebirdservices.homestead.com/Parasites.html shows how awful it can really get if left untreated.
Because these mites get under the skin, and the "home remedies" you'll find in pet shops and recommended online generally don't work and can actually harm the little bird, it is important to locate an avian vet (http://www.aav.org/ will help you locate one near you) and get the right medication.
Ivermectin is the normal medication used for this problem and, because it is poisonous, it is crucial that you have the vet show you exactly how to use it and follow the directions. Often, the vet will use an injectable form of the medication, especially if there are mites around the eyes or other areas where the topical medication can be really dangerous.
I'm attaching some links to help you understand the problem better, but I must tell you that your little bird is pretty miserable right now and really needs medical attention. The vet can diagnose this problem with a scrapping and shouldn't have to do a lot of expensive tests in order to treat your little guy.
Burrowing Mites: http://www.birds-online.de/gesundheit/gesparasiten/grabmilben_en.htm
Scaly Face: http://www3.sympatico.ca/davehansen/scaly.html and
http://www.budgie-care.com/budgie-scaly-face.html
Bird Health: http://resources.bittybirds.com/health.html
Home Safety: http://www.birdsafe.com/household.htm and http://www.parrotparrot.com/articles/aa060900.htm
Diet: http://www.freearticlesarchive.com/article/Why_The_Wrong_Parrot_Diet_Can_Kill_Your_Bird/53588/0/
I am sure once your little budgie sees the vet and gets proper treatment, he will be just fine and no longer suffer from the terrible itching. I'll be pulling for him to feel better quickly.
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