Are you sure that this is socially optimal though. During my first year I gained a lot of satisfaction from having a drink and a smoke at the same time, as the two are complements, and I’m not even a smoker. Furthermore, no when you go to bars it smells like farts and BO, I preferred it when it smelt like smoke.

Surely, if individuals hated being in bars with smokers so much, non-smoking bars would have appeared. After all if non-smokers value not having smoke around, they would be willing to pay a premium, and the bar would sell a differentiated good. If the non-smoker had a smoking friend they would negotiate. If not smoking was so important, the smoker would sacrifice smoking indoors (and maybe choose a worse alternative for smoking outside) for some compensation (e.g. a drink). As this transaction didn’t take place (which would have been a version of the Coase theorem) I doubt the externality was severe enough to require a solution.