...If you set it too low - people are effectively getting known cards for a small price (making it an extreme value play),...
Agree, it cannot be too low, but you may not get a chance to unfold, unless you already know there are at least 2 players in the game, so it depends on your position at the table.
... if you set it too high you'll rarely see it in play and then any smart player would fold it (simply because they know you'd rarely dump a crap load of chips on a losing horse).
First of all, the smart player doesn't have to fold, as unfolding doesn't mean betting/raising, unless the unfolding player also raises (high) later on.
Second, unfolding could be a bluff.
Third, even if you know it's not a bluff, it still make sense to stay in the game if you have a strong hand. Example:
Players:
A- J,J calls 100 pre-flop
B- 3,8 - folds pre-flop, unfolds on the flop
C- lets ignore him, pays BB 100
Flop: 2,3,8 (no flush draw)
After the unfold, the pot increases to 600 (assuming unfold costs 2x pot): 200 from A and C + (2x200 from B) = 600
Player A's chances of winning are only 25.45%, but his chips constitute only 16.67% of the pot.
If player B bets another 100 and A calls, then the chips risked by A are 25.00%, so he still has an edge of 0.45%
And the higher the unfold cost is set, the more it pays to stay in the game even if the odds are not in your favour.