Agreed. Line should be 3/16"
3/8" line is much less restrictive than 3/16" and is not creating the correct resistance to flow to balance the pressure of the co2 setting. 3/8 would only normally be used for very long runs where 3/16 would cause too much restriction for the beer to move through the long hose length at the correct psi.
Also, not certain if you normally store your line the way shown in the pics, or if it's just cuz of the trouble shooting. Ideally you should coil the line up and place it on top of the keg. If you put it on the floor of the freezer you can create pressure differentials in the line. As the beer comes out of the keg, gravity helps it flow faster down to the floor, then it has to move up the line to reach the tap which is working against gravity. You can get some extra foaming where the line switches from a downhill drop to an uphill climb.
Your primary issue here is your line diameter though. Kinda sucks, but line is a fairly cheap fix. Maybe your LHBS will take the line back they erroneously recommended to you.