Cannot read configuration file due to insufficient permissions

There is no problem with your web.config. Your web site runs under a process. In iis you can define the identity of that process. The identity that your web site's application pool runs as (Network Services, Local System, etc.), should have permission to access and read web.config file.

Update:

This updated answer is same as above, but a little longer and simpler and improved.

First of all: you don't have to change anything in your config file. It's OK. The problem is with windows file permissions.

This problems occurs because your application can not access and read web.config file.

Make the file accessible to IIS_IUSRS group. Just right click web.config and click properties, under security tab, add IIS_IUSRS.

So what is this IIS_IUSRS thing?

Your web site is like an exe file. Just like any exe file, it should be started by a user and it runs according to permissions assigned to that user.

When your site is started in IIS, Application Pool of your web site is associated with a user (Network Services, Local System, Etc. ...) (and can be changed in IIS)

So when you say IIS_IUSRS, it means any user (Network Services, Local System, Etc. ...) that your site is running as.

And as @Seph mentioned in comment below: If your computer is on a domain, remember that IIS_IUSRS group is a local group. Also make sure that when you're trying to find this user check the location it should be set to local computer and not a corporate domain.

I had what appeared to be the same permissions issue on the web.config file.
However, my problem was caused by IIS failing to load the config file because it contained URL rewrite rules and I hadn't installed the IIS URL rewrite module on the new server.

Solution: Install the rewrite module.
Hope that saves somebody a few hours.

Editor's note: Doing what this answer says is DANGEROUS! The LocalSystem account is a ...

Completely trusted account, more so than the administrator account. There is nothing on a single box that this account cannot do, and it has the right to access the network as the machine (this requires Active Directory and granting the machine account permissions to something)

Changing the Identity from ApplicationPoolIdentity to LocalSystem did the work ;).

I am using win7 64 with IIS 7.5

more about Application Pool Identity in IIS 7.5 and win 7