What economic theory emphasizes government intervention to correct market failures?

The correct response highlights Keynesian economics, an economic theory developed by John Maynard Keynes during the Great Depression. This approach fundamentally emphasizes the role of government intervention in managing economic fluctuations and addressing market failures.

Keynes argued that during periods of economic downturns or recessions, private sector demand can become insufficient to sustain full employment and economic stability. To counteract this, he advocated for increased government spending and other fiscal policies aimed at stimulating demand. This could include investments in public projects, tax cuts, or other measures to encourage consumer spending and business investment, thereby fostering economic recovery.

In contrast, other economic theories focus primarily on minimal government intervention. For instance, Austrian economics emphasizes the importance of free markets without external interference, believing that such intervention distorts the natural market mechanisms. Libertarian economics similarly advocates for limited government involvement, prioritizing individual freedom and the self-regulating nature of markets. Lastly, monetarism, championed by Milton Friedman, focuses on the control of money supply as a means to regulate the economy, rather than direct government spending to correct market discrepancies.

Thus, Keynesian economics is particularly relevant in contexts where government intervention is seen as necessary to correct imbalances and promote economic stability.