That's a very theoretical argument, and there's nothing stopping people in region Y from building all the housing they could possibly need in region Y. If it's such a great idea, region Y will thrive and reap the rewards of this policy.

And my point is that there are limits on the impact region X has on region Y based on their proximity. Should someone in downtown LA be able to compel someone in Palo Alto to upzone based on this "impact"? What about someone in Kansas or Florida?