Which of the following best describes the difference between mandatory and discretionary spending in the context of public solutions to externalities?

• A. Mandatory spending is only used to address negative externalities, while discretionary spending is used for positive externalities.
• B. Mandatory spending refers to expenditures required by law, such as entitlement programs, while discretionary spending is determined annually through the budget process.
• C. Mandatory spending is allocated for environmental protection, while discretionary spending is used for military purposes.
• D. Mandatory spending can be changed each year by Congress, whereas discretionary spending is fixed and cannot be altered.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the definitions of mandatory and discretionary spending in the context of government budgets. Mandatory spending refers to expenditures that are required by existing laws or entitlements, meaning the government must pay these amounts regardless of the annual budget process.
2. Step 2: Recognize that discretionary spending is the portion of the budget that Congress decides on each year through the annual appropriations process. This spending can be adjusted or changed annually based on policy priorities.
3. Step 3: Analyze the options given by comparing them to these definitions. For example, check if the statement about mandatory spending being only for negative externalities aligns with the concept of legally required expenditures.
4. Step 4: Evaluate whether the statements about spending being allocated specifically for environmental protection or military purposes correctly reflect the nature of mandatory versus discretionary spending, or if they confuse spending categories with policy areas.
5. Step 5: Conclude that the best description is the one that correctly identifies mandatory spending as legally required expenditures (like entitlement programs) and discretionary spending as the budget-determined spending decided annually by Congress.