Multi‐level environmental governance (MLEG) has become commonplace, yet few attempts have been made to explain in economic terms why it should have emerged. This article examines four economic explanations for MLEG. The first considers it as a solution for overcoming collective action challenges when a large number of actors are involved. The second explanation is that multiple levels of environmental governance may be needed to minimize governance costs. Thirdly, path dependence could explain MLEG. Fourthly, complex and multifunctional resource systems may generate ecosystem service flows that have benefit catchments of different size, and multi‐level governance solutions may be needed to link providers and beneficiaries. While they are to a degree complementary, the analysis suggests that the multi‐functionality explanation is the most nuanced one of them and offers the best diagnostic for governance challenges that an environmental resource system poses. © 2015 The Authors. Environmental Policy and Governance published by ERP Environment and John Wiley & Sons Ltd