I'm not familiar enough with Gecko's internals to answer, unfortunately.

It’s Chrome where it doesn’t work (requires extra effort to configure around the proxy block). Works fine on Firefox, but guessing now that too will need the workaround.

Point me to a bug? I don’t think I understand the problem.

It’s not a bug, but a security feature apparently. I run into it because I teach hacking using Burp and Web Goat (running on localhost). Chrome doesn’t allow proxies on localhost by default.

I was asking about the reason behind the choice. Sorry, should have been more clear.

If it's a network stack choice, @sleevi_ might have insight?

On Windows (at least), put "<-loopback>" into your proxy bypass list to remove localhost from the bypass list. I put this in IE9 and it got picked up by Chrome.

This isn't so much a "security" thing as a "browsers don't expect a (typically remote) proxy to know what to do with a loopback address if they receive one.