Although for smokers the marginal benefit from smoking may exceed the marginal cost of smoking, the negative effects of second-hand smoke may increase the marginal costs of smoking to society to a point where it exceeds that marginal benefit to society. This is an example of: a individual actions whose side effects are not properly taken into account by the market. b one party preventing mutually beneficial trades in an attempt to capture a greater share of resources for itself. c regulating self-interest. d some goods' unsuitability for efficient management by markets.

I'm not sure that the benefits smokers get from smoking exceed the costs of smoking, since addictions don't generate real benefits, the most that they do is create an illusion of a benefit. It is really hard to argue against a person's self-destructive behavior since they usually simply deny it. The same applies to people who consume alcohol or drugs.

The real problem is that smoking (and also other addictions) affect other people in a negative way. If you want to bang your head into a wall it's your problem but when you hurt someone else it should be society's problem. Cigarette manufacturers should be liable for the damage that second hand smoking produces and that way they will either find a way to reduce that damage or sell their cigarettes somewhere else.