Objective - Industrial development has a significant contribution on the welfare achievement of Mojokerto. However, these achievements have also brought about the negative impact such as environmental degradation. Nonetheless, new institutional economics have developed a theory for the purpose of solving such environmental conflicts and this is called institutional ecological economics. Since resolving environmental problems is dependent on the quality of institutional structures, this research aims to show the role of institutional economic environment in minimizing negative environmental externalities for example, water pollution, in the Mojokerto Regency.

Methodology/Technique - This research is qualitative in nature. It uses interviews and observations to collect the data required. For the purpose of illustrating water quality, a table is depicted based on biological and chemical parameters used. The research site is set in Watesnegoro Village, a sub district of Ngoro, Mojokerto Regency, making this a case study.

Findings - The findings extracted from this research suggest that (1) Environment governance in the Mojokerto Regency had not effectively reduced water pollution, (2) The internalization of externalities as described in the economic theory was unable to be implemented because of the high transaction cost, (3) There are rent-seeking behaviours in the waste water pollution policy where the corporation and government have a collusion to gain their own interest.

Novelty - The outcome of this research indicates that negative externalities on the environment caused by the industry needs to be further studied so as to understand the relationship of industrial activities on the environment.

Type of Paper: Empirical

Keywords: Water Pollution, Institutional Ecological Economics, Rent-Seeking, Mojokerto Regency, Indonesia.