This so-called free market solution just isn't how things work out in practice - it's how things are right now - every establishment can theoretically choose whether or not to allow smoking. In theory, banning it expands their customer base - anyone can go to a non-smoking establishment, but a smoking establishment effectively bans anyone who can't or won't tolerate it. In practice, though, it's impossible to quantify how many customers they would gain from switching to non-smoking (because they're indistinguishable from people who still wouldn't become customers), but, since the competition allows it, they're guaranteed to lose their smoking customers to the competition.

Since customers don't grow on trees, the market effectively doesn't give them a choice, and the result is that every restaurant caters to the habits of the one guy who wants to light up instead of everyone who'd rather they didn't, because they're mostly not quite upset enough to leave without paying, and a boycott just makes them invisible.