We tend to think of the Australian economy and the ASX as 'free markets'. Sure, Australia doesn't have the same reputation for 'frontier freedom' that the United States is famous for, but all in all, we have a pretty free economy and stock exchange – there is minimal state interference and we have strict laws to ensure a level-playing field for all public companies.
However, to paraphrase some famous Orwellian pigs – "all shares are equal, but some are more equal than others". Here I am referring to some companies that receive certain benefits from the government. These may be implicit or explicit, but investors in these companies have something of an edge over others as the government provides incentives to their customers to continue to use their products.
Let me explain by outlining two government-backed ASX shares.
Insurance Australia Group (ASX: IAG)
IAG is the largest insurance company on the ASX and benefits enormously from multiple government policies. Everyone who owns a car or motor vehicle would know that Compulsory Third-Party insurance is a mandatory purchase when registering a vehicle, meaning millions of motorists are forced to buy either IAG or a competitor's product every year.
This gives the company an inelastic earnings base, which IAG can further leverage for other insurance products (think comprehensive motor insurance, home insurance, etc.). No wonder Warren Buffett bought some shares in IAG a few years ago.
Medibank Private Ltd (ASX: MPL)
Medibank is the largest provider of private health insurance in Australia and actually used to be government-owned. In order to reduce pressure on the publicly funded Medicare system, the government gives a number of tax incentives and rebates for individuals to take out private health cover, which intensify as individuals' incomes rise. These include the Medicare Levy Surcharge, Private Health Insurance Rebate and Lifetime Health Cover Loading. Long story short, the government is trying to herd customers into the arms of Medibank Private and other private health insurers, which Medibank shareholders wouldn't be complaining about, I'm sure.
Foolish takeaway
If you can find a company that the government encourages (or forces) customers to use, you might have found yourself a winner. Although we live and invest in a free market, some markets are freer than others and investors can use this to their advantage if you know where to look.
