When is it appropriate to use the Union tool in ArcGIS?

Using the Union tool in ArcGIS is indeed most appropriate when the objective is to overlay two feature classes while preserving all features from both datasets. This tool creates a new output feature class that includes all the features of the input feature classes, including those areas that overlap.

The Union tool merges the geometries and attributes from both input feature classes, resulting in a comprehensive spatial dataset that reflects all the original features, even those that intersect. This is particularly useful in geographic analyses where retaining complete data from both layers is crucial, such as when assessing land use changes or combining various geographic data sources for a holistic view of the landscape.

In contrast, other tools mentioned serve different purposes. For instance, the combination of features with the removal of overlapping areas is more typical of the Intersect tool, not Union. Clipping involves using one feature class to define the extent of another, which is accomplished with the Clip tool. Lastly, generating a buffer is a unique operation aimed at creating zones around features, which is handled by the Buffer tool. Thus, the Union tool's specific capability to maintain all features makes it the correct choice in this context.