Public Goods

Public Goods are services or resources that are, for all practical purposes, available to every member of a society. Think of national defense, streetlights, or a broadcast radio signal. In economics, a good is considered “public” if it meets two very specific criteria: it is both non-rivalrous and non-excludable. This isn't about who owns it (the government or a private entity) but about the nature of the good itself. Understanding this concept is surprisingly useful for a value investor, as it helps identify industries where governments must spend money, creating stable and predictable markets. These goods are often funded through taxes precisely because private companies would struggle to profit from them, creating unique opportunities for businesses that can secure government contracts to provide them.

To truly grasp the concept, let's break down the two defining characteristics. A good or service must have both to be a pure public good.

A good is non-rivalrous if one person's consumption of it does not diminish the amount available for others. A classic example is a lighthouse. When a ship uses the lighthouse's beam to navigate, it doesn't “use up” the light. The beam is still there, just as bright, for the next ship to use. The same goes for a radio broadcast or national defense. Your protection by the armed forces doesn't reduce the level of protection your neighbor receives. In contrast, a private good like a slice of pizza is rivalrous. If you eat it, no one else can.

A good is non-excludable when it's impossible or prohibitively expensive to prevent people who haven't paid for it from enjoying its benefits. Once the lighthouse is built and shining its light, it's very difficult to stop any ship in the vicinity from using it. Similarly, how would you charge each citizen individually for the benefit of clean air or the protection offered by the military? You simply can't. This is where the famous free-rider problem comes in. If people can benefit from a good without paying for it, they have little incentive to contribute voluntarily. This is why private markets typically under-provide public goods, creating a role for government intervention.

The concept of public goods is far from a dry academic topic; it points directly to massive, durable investment themes. Since the private market can't effectively provide these services, governments step in, and they often contract private companies to do the work.

An investor can look for companies that are essentially “picks and shovels” providers for public goods. These businesses often enjoy long-term, stable contracts backed by government spending, which can create a powerful economic moat.

• Defense: The ultimate public good. Companies like Lockheed Martin or BAE Systems build the equipment that provides national security. Their primary customer is the government, which provides a steady stream of revenue.
• Infrastructure: While a road can be a toll road, much of our basic infrastructure (local streets, sanitation systems, bridges) functions as a public good. Companies that build and maintain this infrastructure, like Vinci SA or Ferrovial, are direct beneficiaries of government spending.
• Public Safety & Services: Think about companies that manage municipal waste, like Waste Management, Inc., or those that provide technology for emergency services. They are fulfilling a core public need, often on long-term contracts.

The key for a value investor is to look for well-managed companies in these sectors that trade at a reasonable price. The government's role as a consistent, reliable customer can provide a margin of safety against the volatility of consumer-driven markets.

Not everything fits neatly into the “public” or “private” box. Some goods are what economists call Quasi-Public Goods. They have some, but not all, of the characteristics of a pure public good. Typically, these are goods that are non-rivalrous (at least to a point) but are excludable. A classic example is a toll road or a bridge. It's non-rivalrous up to the point of congestion—one extra car doesn't really affect anyone else on an empty highway. However, it's excludable because you can be stopped from using it if you don't pay the toll. Cable TV and uncongested public parks are other great examples. Understanding this distinction can help you analyze the business models of companies operating in these areas. They might enjoy utility-like characteristics but have the ability to charge customers directly, offering a different but still potentially powerful investment case.