According to the residents of Little Lamplight and its history, the fungus appears to "like" strange meat. This is connected to the fact that the original fungus grew "from the water where the first Little Lamplighters dumped the bodies of the mungos". Once the player learns that strange meat is actually human meat, all the pieces fit together that cave fungus grows off and feeds on the remains of humans.
Cave fungi are pieces of fungus skewered on a stick, like a "kebab". Upon consumption it can restore some of the users health, while slightly reducing radiation. The fungus' radiation scrubbing ability makes it an effective and nutritious health booster out in the wasteland.
Alternatively, it can be acquired directly through Mayor MacCready, after a successful speech challenge but this will result in negative karma. The price is lowered with a higher Barter skill or with the Child at Heart perk.
Some cave fungus can also be located in the cafeteria area of Little Lamplight and taken with no negative karma.
You can pick up some cave fungus without doing the quest by simply looking around the area manually.
Behind the scenes
In another Bethesda game, The Elder Scrolls IV: Oblivion, there was a mushroom called Cairn Bolete that was said to only grow in caves where people had died.
The following is based on Fallout 3 cut content and has not been confirmed by canon sources.
The following is from a cut Vault 106 note in Fallout 3. It describes fungus growing in caves.
Spore Color=Hyper Blue
The U. Noslen seems to produce a compound that when exposed to the conditions of the cave are able to shield it from harmful radiation. The rate at which the fungus degrades the stone appears to be slowed. Study shows that the U. Noslen reproduces by dispersing small amounts of diaspores. Due to the lack of wind sources, the fungus is usually clusters but occasionally is able to fan out to other surfaces.
End of information based on Fallout 3 cut content.
Italics denote consumables items available through add-ons.
↑Lone Wanderer: "Where does the fungus come from?" Eclair: "It's pretty hard to find, and I hear it doesn't grow in other caves. I don't know why it's here, but without it, we'd be goners. Think fungus just grows on trees? No, it grows in caves! Ugh. Knock Knock came up with that one once, and now it's stuck in my head forever. Doesn't take any work to get it to grow down here. All I have to do is collect and prepare it. Mostly, I try to get the stink off it. They say the fungus grows in the pools where the first Lamplighters dumped the mungos. That's about the most they ever helped us. I don't know how true that is, but I know sometimes the scav team comes back with this strange meat that tastes terrible, but the fungus loves it. I don't know where they find that meat, but if you could bring some back, I'd be glad to trade fungus for it. Of course, MacCready'd have to okay it." (Eclair's dialogue)
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