Collusion: Should Government allow it?

Collusion, we often hear this term used negatively, but can there be a case wherein collusion can actually be beneficial not only for the market but also for the population at large?

I want to take a hypothetical example of the tobacco market to put across my thinking as to why the government would allow the firms in the market to collude.

Let us imagine a tobacco products market with only two firms, Firm A and Firm B. Both the firms are competing to get a hold of the market, but since both the firms want to capture the maximum chunk of the market, they are involved in undercutting each other's prices. This results in a market where the price of tobacco products decreases.

Let me also make one more assumption here that both the firms have deep pockets, and hence this price war intensifies to a point where the tobacco products become dead cheap. The government, in the meanwhile, observes that as the price of tobacco products is decreasing, the consumption of tobacco products has increased. As more and more people consume tobacco, the health care problem increases. Tobacco consumption also affects passive smokers and displays a negative externality, which further compounds the problem. To decrease the consumption of tobacco products, the government would levy taxes on these items. Nevertheless, the problem is that since both the firms have a good amount of cash to burn, they decide not to pass on the tax burden to the consumers. Hence, the tobacco products are available in the market at that exact price as before the government imposed the taxes.

In line with the principles of governance, and I am hoping that this is not an assumption and that the government does think about the welfare of its people, the government would call both these firms for a meeting. In the meeting, the government would ask these firms to collude and come up with a mutually beneficial price. The price is decided between the two firms, and the very next day, the tobacco products' prices shoot in the market. The tax levied by the government now has its intended effect as the firms completely transfer the tax burden to the consumer. The market still flourishes as the people have become addicts to the product, and hence the company still reap the profits; however, the increased prices of the tobacco products will now at as a barrier, and the total proportion of new customers that were being added to the market will decline significantly. Therefore the health of the society will ultimately be positively affected by the decision of the government to allow collusion.???????

I know that a lot many assumptions went in there. However, we can definitely see that collusion does not carry negative meaning always, and we can use the microeconomic concepts in various manners to bring about a positive change in society.