"...Externalities sometimes justify government intervention. If I run a factory that spews pollution into the air, the damage to my neighbors and the environment is part of the overall social cost of running my factory. Because I don't bear those costs, however, I have no incentive to reduce the pollution my factory generates. By adopting appropriate regulations, the government can force me to internalize the cost of pollution, which is a fancy way of saying that the government can force me to take those costs into account when I make decisions.
The mere existence of an externality does not justify legislation, however. In a free society, with limited government and respect for private property rights, at least two conditions must be satisfied before government intervention is warranted. First, my actions must in fact produce external costs. Second, there must be a market failure -- that is, people must be unable to solve the problem without government help.
Because I�ve conceded the first prong of the test, the merits of public smoking bans comes down to the question of whether the problem can be solved private ordering. In other words, if we let the owners of private property decide whether people will be allowed to smoke on their premises, will non-smokers be exposed to unreasonable costs?..."
Read the rest here: "Smoking bans and private property rights"