Smoke cannot be banned because it would be a huge and totally unrequested and unacceptable limitation of people freedom. Smoking a lot is as dangerous as many other "a lot" things in our life, for example:
"the negative effects of eating junk food are long proven"
but have you ever heard of a government trying to impose its population an healthy diet? How do you think people would react? Another example, many motorcyclists die every year because, let's be honest, it's a dangerous hobby (I'm a motorcyclist myself and aware of it)
What a government can do is to educate people and try to limit collateral damage (aka passive smoke, in this case)
What a government cannot do is to just step up and say "ok, from now on we'll tax tobacco so that no one will be able to buy it", because it would be exactly like banning it. And by the way, you are asking why governments do not raise prices of cigarettes, but cigarettes are a just a normal products from some manufacturer; the government cannot just impose price of products to companies (again, freedom). Up to a limit you can justify higher taxis to cover national health expenditure (in case of cigarettes, it's different for other taxis), but to raise prices to the level of making them impossible to buy? Naaa.
And, note: I lost my loved grandfather 'cause of smoking, I don't like smoke at all (not just for my grandfather), I'm happy that I don't have to passively smoke when drinking my coffee, and so on. Still, I think we should stop being hypocrites when it comes to it; people have the right to choose, everybody is informed about the risk of smoke, we don't even allow advertising on cigarettes, it's more than enough; once you spread information, once you educate people, once you've done everything possible, heck, let people take their decisions. It's their life, after all, and unlike drugs they are only damaging themselves.
Could I take a decision, I'd remove the idiotic law about the ugly packages and about sponsorships.