Present study is an attempt, first, to assess the impact of environmental degradation on economic life of rural communities in India, in terms of actual loss suffered by farmers due to fall in agricultural productivity, reduction in livestock population and deterioration of health, as a result of institution of some polluting industries in areas adjacent to their habitats. Secondly the study undertakes an investigation into the effectiveness of existing regulatory measures and the process of governance with a view to locating their points of success and failure. It carries out an elaborate investigation into the potentiality of some supplementary instrument of environmental management to the existing 'command and control' system, with a Game theoretic framework of analysis. Drawing extensively on the existing theories on the role of collective action in halting environmental degradation, attempt has been made to examine the potentiality of some grass root level organizations of the affected people in taking leading role in the formation of Voluntary Agreement among the stake holders, with a view to ensuring loyalty to the collective interest of environmental protection.