I believe this may be a problem in the registry. In particular, I think this lies under HKCR.
I would like you to check some registry data manually first.
WARNING: Editing the registry can be dangerous. You are warned!
First, fire up Registry Editor (run regedit.exe from the start menu search box).
Then navigate to HKEY_CLASSES_ROOT\.exe. On the right you should see (Default) of type REG_SZ having the data exefile. Comment below and stop here if this is not on your machine.
Then also navigate to HKEY_CLASSES_ROOT\.lnk. On the right you should see (Default) of type REG_SZ having the data lnkfile. Comment below and stop here if this is not on your machine.
If you passed the above check, then you can follow the following steps to attempt to fix the problem.
WARNING: Editing the registry can be dangerous. You are warned twice!
The following fixes .exe files:
Navigate to HKEY_CLASSES_ROOT\exefile\shellex\DropHandler. On the
right you should see (Default) of type REG_SZ, but may not be
having the data {86C86720-42A0-1069-A2E8-08002B30309D}.
Now, select "File" -> "Export" on the menu to backup the data.
When you've done exporting the data, you should try editing the data
of the item (Default). Double-click on (Default), then paste the
following value {86C86720-42A0-1069-A2E8-08002B30309D} and click
"OK" (or press Enter).
The following fixes .lnk (Windows shortcuts) files:
Navigate to HKEY_CLASSES_ROOT\lnkfile\shellex\DropHandler. On the
right you should see (Default) of type REG_SZ, but may not be
having the data {00021401-0000-0000-C000-000000000046}.
Now, select "File" -> "Export" on the menu to backup the data.
When you've done exporting the data, you should try editing the data
of the item (Default). Double-click on (Default), then paste the
following value {00021401-0000-0000-C000-000000000046} and click
"OK" (or press Enter).
After that, close Registry Editor and restart explorer.exe. The easy way is to log off then log in.
By default, you can also drop to .bat, .cmd and some more file types. If you find that you can't also, find a working Windows 7 machine and copy the corresponding registry values.
To quote the Google support article[1] (emphasis mine):
If you select Allow on a "http" URL your preference will not be
remembered in future visits. If you select Allow on a "https" URL,
your preference will be remembered in future visits. You can monitor
which site is using your camera and microphone by clicking the camera
icon or microphone icon microphone icon in your Windows system tray or
Mac status menu.
Similarly, one will often see the video camera icon in Chrome's address bar during such requests, or of course the flash-based camera prompts.
So the question I pose is whether you're seeing this on a flash webcam site, or any that would attempt to use the webcam, such as an HTML5 website (a good one to test is here: http://wolframhempel.github.io/photobooth-js/).
If you verify it works with HTML5 and not flash, the culprit may be the flash plugin, or settings on that particular website.
[1] https://support.google.com/chrome/answer/2693767?hl=en
Best Answer
Somehow I set chrome.exe as "Run as administrator" from "Right Click Shortcut -> Properties -> Compatibility". Unchecking this solved the problem.