How effective is Itunes "error correction" for CD imports?
Besides the raw audio data, CDs come with error correction codes, which, usually, are not read, assuming the data integrity. This leads to the typical poping or clicking sound heard when the CD has any defects, such as scratches, fingerprints or even manufacturing defects.
By turning on Use Error Correction, iTunes will read and process these error correcting codes along with the audio samples, correcting any found errors.
These error codes are called Reed-Solomon and this Wikipedia's extract explains how it works:

In the CD, two layers of Reed–Solomon coding separated by a 28-way convolutional interleaver yields a scheme called Cross-Interleaved Reed Solomon Coding (CIRC). The first element of a CIRC decoder is a relatively weak inner (32,28) Reed–Solomon code, shortened from a (255,251) code with 8-bit symbols. This code can correct up to 2 byte errors per 32-byte block. More importantly, it flags as erasures any uncorrectable blocks, i.e., blocks with more than 2 byte errors. The decoded 28-byte blocks, with erasure indications, are then spread by the deinterleaver to different blocks of the (28,24) outer code. Thanks to the deinterleaving, an erased 28-byte block from the inner code becomes a single erased byte in each of 28 outer code blocks. The outer code easily corrects this, since it can handle up to 4 such erasures per block.
The result is a CIRC that can completely correct error bursts up to 4000 bits, or about 2.5 mm on the disc surface. This code is so strong that most CD playback errors are almost certainly caused by tracking errors that cause the laser to jump track, not by uncorrectable error bursts.