In 2008, the Iowa legislature passed a ban on smoking in virtually every building open to the public in the state. That is, no business, no bar, and no restaurant in Iowa may allow people to smoke on their premises. The argument for passing the law was that it would prevent the dangers of second-hand smoke to patrons and workers.
The smoking ban provides an excellent illustration of the difference between how the free market solves problems, and how the government solves problems.
The types of restaurants in a city are allocated by the free market. If you look at Ames, for example, there are lots of pizza places, lots of Mexican places, lots of hamburger places, fewer Greek places (but some), and fewer seafood places (but some). That is, because lots of people like pizza, Mexican food, and hamburgers, the market supplies a lot of them, and because fewer people like Greek and seafood places, there are fewer of them, but even people whose tastes are in the minority have some place to go.
Similarly, before the smoking ban, the market allocated the smoking rules at the restaurants in Iowa. For example, in Ames, according to the Ames Tribune, 65% of the restaurants did not allow smoking prior to the ban, and 35% did allow smoking. Because most people did not want to eat in a restaurant that allows smoking, most restaurants did not permit it, but for those people who wanted to go to a restaurant and smoke, they had a place to go too, so everybody (even people whose tastes were in the minority) had some place they could go.
But now the government decided to get involved. Because the majority does not like smoking, the legislature passed a law imposing the majority preference on everybody: namely, no building open to the public is allowed to have smoking. People with minority preferences (i.e., people who want to go somewhere where they can smoke while they eat or drink or work) now get nothing.
Alexis DeTocqueville wrote a famous book called Democracy in America in which he argued that the main problem with the American government was that it would allow a Tyranny of the Majority. That is, the majority could use the government to impose their preferences on everyone else. High School Civics teachers, if you are looking for an illustration of Tyranny of the Majority for your class, the smoking ban is exactly what DeTocqueville was talking about. Among a free people, what citizens who have voluntarily gathered on private property (like a restaurant or bar or business) do that is harming no one off the property is quite simply none of the government's business. The smoking ban is fundamentally incompatible with a free society.
You object: but what about people who work at these businesses? Don't we have to protect them from the health risks associated with secondhand smoke? Lots of jobs have health risks associated with them. Automobile accidents are the third leading cause of death in the United States, and many people have to drive as part of their job. Construction workers, lumberjacks, and fishermen all have jobs far more dangerous than people who work around second hand smoke (source: http://moneycentral.msn.com/content/invest/extra/P63405.asp). People take these jobs because they believe (usually rationally) that the benefits of performing those jobs outweigh the health risks, and, among a free people, they get to make the trade-off between the dangers of a job and the benefits of a job themselves, without the government imposing that decision upon them. Similarly, there are many reasons why some people might prefer to work in a business that allows second hand smoke: for example, more money through salary or tips, liking the clientele, or because they themselves smoke. In a free society, people are allowed to make the trade-off between safety and the other benefits of a job for themselves. There is no reason why people who work in businesses that allow smoking should have any less freedom to make the trade-off between safety and other factors on the job than any other profession.
A free society is impossible unless all of us respect and tolerate the decisions that our fellow adult citizens (even those in the minority) make about how they conduct their lives if they are being peaceful. In a free society, if you don't want to eat or drink where there is smoke, there is a simple solution: don't go to restaurants or bars that allow smoking. In a free society, if you don't want to work at a place where there is smoke, there is a simple solution: don't work there.
Here is a link to the "Butt Out" (extremely NSFW please do not click if easily offended) episode of South Park which provides a very clear statement of the libertarian philosophy on the smoking ban issue, and here is an episode of Penn & Teller's show on Showtime about smoking bans (extremely NSFW please do not click if easily offended).
Below is a video of Eric giving a speech in Ames about the Libertarian position on the smoking ban: