In the face of environmental hazards caused by low nitrogen utilization efficiency, this paper constructed a 3-player game model which contains local governments, peasant households, and polluting enterprises with bounded rationality, all of which take part in the nitrogen cascade in the watersheds. The Nash equilibrium points and local stability of the dynamical systems were investigated. Complex dynamics i.e. bifurcation and chaos arise from the variation of some parameters of the model, including the adjustment speed of decision-making of a boundedly rational player. Numerical simulations were rendered to manifest bifurcation, chaos, maximal Lyapunov exponent, strange attractor, and sensitive dependence on initial conditions. Chaos control of the dynamic systems was discussed using the delayed feedback scheme. Research results indicate that whereas the adjustment speed of players has a destabilizing effect, a proper increment of the ecological compensation or environmental tax rate will restore the local stability of the system. Moreover, while the excessive adjustment speed has caused the system to behave chaotically, an increase of the feedback controller can eliminate chaos and achieve a stable market.