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?

So region Y should shoulder all the costs while X benefits?