Megan posted earlier asking how a libertarian economist might respond to the claim of a market failure for non-smoking bars not cropping up on their own. She theorizes that this must occur because bar owners would not want to alienate the large, profitable customer base that smokes. This explanation, however, does satisfy those who believe efficient markets should have produced smokeless bars through non-smoker demand.
I'd have a few suggestions.
I would first argue that alcohol and cigarettes are probably complementary goods. Having bars without smoking is kind of like having a hamburger restaurant with no hamburger buns: the two go together naturally. You could have one without the other, and there may even be a market for that. But these goods are so complementary, it might not happen.
For cigarettes and alcohol, I'd argue that their complementary nature is historically driven and probably less functionally driven like the hamburger and bun comparison. However, since both are drugs, I would argue that there is a bit of functionality there as well. Those who are willing to partake in cigarettes are more likely to partake in alcohol than those who are less willing to partake in cigarettes, and vice versa.
I would next assert that most people who go to bars must not mind smoke that much. If they did, they wouldn't go. While for some non-smokers, the presence of smoke may knock a few points of utility off their experience at the bar, it must not make that utility negative. Maybe that utility loss is so minimal that it wasn't strong enough to inspire a demand for smokeless bars. A weak demand should not necessarily create a new market. The demand for smokeless bars must not have been strong enough.
This does not seem like a market failure to me, because I would further argue that there's always been a substitute for smoke-filled bars: smokeless homes. Anyone who truly abhors smoke can simply throw or attend social gatherings at houses or apartments. In that setting smokers can politely be asked to smoke outdoors or go home.
How strong is the house party substitute? If I had data on whether house parties have decreased since bar smoking bans have taken effect, then that would be helpful. I don't, and other variables like the desire to drink at home for cheaper during a recession might skew the data anyway. I still doubt, however, that the minor harm to utility that smoke in bars causes most people inspires them to seek alternatives.
As a result, I wouldn't call a lack of smokeless bars a market failure, because I don't think that markets with lackluster demand that already contain pretty good alternatives should be created. Is there a market for hamburger restaurants with no buns for carb conscious people? Maybe, but it doesn't seem to be strong enough for bun-less hamburger restaurants to be popping up -- especially since people can just cook their own at home without the bun if they choose.