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I don't think there's any need to keep elves out of Bree. There's an idea that's been in Fantasy RPGs for as long as they've existed, that for verisimilitude the faux-medieval towns should be only human, or monocultural. There doesn't seem any need for it here, and I don't think it's textually supported by the very open-minded and gregarious Breelanders in the 2E book, or by Tolkien's work.Or by more modern historical approaches to ethnicity in medieval Europe.

Very different and largely independent measures for sure.

From a Tolkien perspective, as far as I can tell the intended impression is that elves in Eriador are an uncommon sight, don't know if it is actually stated anywhere.
If that is correct then it is irrelevant if that may have originated from a conscious or subconscious need for verisimilitude - in a theoretical analysis perhaps but not in a practical realization.
To be honest, having regional different largely monocultural populations can help provide an easy access to a locally different flair and cultural conflicts. In some RPG settings everything has been thrown together - mostly to allow players to choose any kind of background without consequences - that differences basically are reduced to window dressing.
But that too is largely irrelevant if you want to base it on Tolkien.

That said, just because that might lead to few local elves, it doesn't really prevent player choices. For one, no matter how rare X is in culture Y, adventurers are usually a rare and strange breed anyway, so that wouldn't hurt. And as mentioned before, you can play RP wise very nicely with being an uncommon sight, causing positive or negative reactions from the locals.
Because of that I don't really see a problem with that in single party games. It is another topic perhaps in a MMORPG, where you have the concurrency of dozens of such instances.
A single instance is an outlier and outliers make good story hooks, common occurrences need more explanations.

I don’t know why this is a problem. St the beginning of the chapter “at the sign of the Prancing Pony” Tolkien himself states that the men of Bree are more friendly and familiar with elves than is usual with most big people. Why do you all think that elves from Lindon didn’t do business at Bree or stop at the inn? While they might not have been usual sights in Bree, they had to be seen enough for the people of Bree to be more FRIENDLY and FAMILIAR with them as Tolkien says himself. Don’t confuse your opinion of Tolkien’s world with Tolkien’s opinion (and clearly stated fact) of his own world

Tolkien never had many stated facts or set opinions on most aspects of his work. Reading HoMe and his letters make that apparent. It's also made clear that the Elves do not interact with outsiders much at all, nor do any of the Free-peoples, who in those times had grown estranged. That section of LotR was written when the story was going to be a more lighthearted tale, and Strider was still a Hobbit named Trotter.

However, it ultimately doesn't matter because its your game, run it how you want.

Say what you will, I consider the polished works canon. The HoME is just that notes and history. If the FoTR clearly says the men of Bree were friendly and familiar with the elves of Lindon (not high elves but green and wood elves). Then there is no problem with an elf in the prancing pony.

Tolkien changed Trotter, he didn’t change the part about the men of Bree. That should tell you something.

This discussion is clarifying, and we each may have a different sense of what is canon or desirable.

Whatever sort of Bree one has in mind, I look forward to treating Elves and their magical successes as a source of suspicion and distrust, similar to Mr. Underhill's untimely disappearance in the middle of his song in the common room of the Prancing Pony. Familiar or friendly Bree may be toward Elves passing through, yet the direction I'm going is that they might simply be accepted as travelers and not exactly woven into the fabric of the town.

Agreed! My thoughts exactly. Elves passing through and stopping at the inn are one thing, but elven magic and elves living in Bree would not be looked upon well. Tolkien said that the men of Bree are MORE familiar and friendly, not that they are elf friends! The same could be said about dwarves in Bree as well

I would agree that generally the distinction between visitor and local (old or recent) might be more important to overall reactions than where the respective persons actually come from - within reason of course.

Say what you will, I consider the polished works canon. The HoME is just that notes and history. If the FoTR clearly says the men of Bree were friendly and familiar with the elves of Lindon (not high elves but green and wood elves). Then there is no problem with an elf in the prancing pony.

Tolkien changed Trotter, he didn’t change the part about the men of Bree. That should tell you something.

Considering he changed the text of the Hobbit on more than one occasion and also edited LotR after it was published begs to differ. The Lengendarium was highly mutable all the way up until his death. Not to continue the argument over Elves in Bree so much as to point out that even the published works were sacrosanct.

This discussion is clarifying, and we each may have a different sense of what is canon or desirable.

Whatever sort of Bree one has in mind, I look forward to treating Elves and their magical successes as a source of suspicion and distrust, similar to Mr. Underhill's untimely disappearance in the middle of his song in the common room of the Prancing Pony. Familiar or friendly Bree may be toward Elves passing through, yet the direction I'm going is that they might simply be accepted as travelers and not exactly woven into the fabric of the town.

You could treat them as outsiders and a shock without going to suspicion and distrust. People could be awed, shocked, impressed, tongue-tied, bemused, disbelieving - there are many more positive reactions to being surprised that might work better, or provide some differentiation between NPCs. Bree has not been over-run by the Shadow, and the people are mostly good, open-minded people.