Now however, government sees all this money being made in the production and sale of widgets, and decides to cut itself in for a share, needing money not only to provide police to protect the widget factories and roads to transport the widgets, but to curry favor among the voters and it’s supporters by providing programs and services to those supporters at no (apparent) cost.

So men acting as government impose a “tax” on the sale of widgets in the amount of 50-cents for each widget sold.

Has the perceived consumer value of each widget now been increased by 50 cents? 

No, it has not.  In spite of the new “cost” imposed by government, each consumer will still only spend at most $2.00 in order to obtain a widget.

In order to continue selling widgets, the investor and producer now find that they must reduce their selling price to $1.50, so that the final price to the consumer remains at or less than $2.00.

With improved production methods and less expensive raw materials, the producer may be able to reduce his costs of production to about 80-cents per unit, leaving him with a 70-cent margin, instead of the previous $1.00.

As a result of this, the investor is now less enthused about investing in new widget-production capacity, choosing instead to invest his resources in an enterprise that promises at least a 75-cent return per unit.

Similarly, other producers and investors who may have been motivated to produce widgets in order to obtain the previous $1.00 margin of profit, are now less inclined to invest in the production of widgets, choosing instead to invest in productive activities where they may obtain a return of 75-cents or more.

As a result, the supply of widgets available for sale remains lower than it would have otherwise, and without the competition of multiple suppliers and improved production techniques, the price to consumers remains high.