I found a solution on stackoverflow thanks to @kbenoit there.
https://askubuntu.com/questions/117899/configure-networkmanagers-
dnsmasq-to-use-etc-hosts
This is not really a bug at all. You just have to configure stuff under
/etc/NetworkManager/dnsmasq.d instead, e.g.,
# echo "addn-hosts=/etc/hosts" > /etc/NetworkManager/dnsmasq.d/hosts.conf
# service network-manager restart
I will point out the following statement from the networkmanager.conf
man page ON THE GNOME WEBSITE (not on the ubuntu 16.04 man page):
It is possible to pass custom options to the dnsmasq instance by adding
them to files in the "/etc/NetworkManager/dnsmasq.d/" directory.
Add any options you want.
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https://bugs.launchpad.net/bugs/993298
Title:
Please make NetworkManager-controlled dnsmasq respect /etc/hosts
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