I think it would have been more effective to pass a law that bans people from suing tobacco companies for getting lung cancer, even though said people knew that smoking was unhealthy.
In addition to that, a law that bars smokers from qualifying for state funded health benefits would have been a good choice as well.
Option 2 is a bit much (if you are going to have state funded health programs, they should be available for everyone as everyone pays for it, including smokers and obese people), but yes, tobacco companies have plenty of warnings on their products and smokers know what they are getting into.
