I had this error message that turned out to be due to my physical folder being located on a network drive as opposed to the local drive. It seems the permissions on such drives by default can be different. For example, while the local drive location gave permission to the users of the local computer, the network location did not.
Further, the accepted answer does not work for such a case. The local users or IIS users were not an available to assign permissions to. The solution was to move the physical folder to the local drive.