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The RPM drop when you turn the lights on could be normal as the alternator load increases when the lights are on. It shows that the battery is charged and the regulator is sensing the increased load.
Or... there's a really big load on the light circuit (short to ground?) doing the same thing as above but drawing lots of current and causing the smoke.
Or... the smoke could just be the wire resistor for the dash light dimmer if the switch is brand new and there's oil on the resistor.
i am not completely sure i follow here, should i try replacing the switch thats hooked to the dash that turns the lights on and off and dims the interior lights? and see what that does? or will the problem just re-curr.. or is it to difficult to tell if it will or not
It would sort of depend on how much smoke was created. If it was more than just a wisp, coming from the dash dimmer (which is part of the headlight switch), you'll want to check out exactly what got toasted. More than likely the connections at the switch have corrosion/carbon build-up. If any of the wires or the connector block are melted, you'll have to repair whatever is bad. A little more work than just replacing the switch but if not done, you'll end up toasting a new switch due to the high resistance in the bad connections.
You'll probably want to pull the instrument cluster back out to get a good look at where it's smoking.