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Yes, apparently you can open an instance for yourself of any zone and set the difficulty at that time. More difficult = more xp and loot.Interesting.. saw "Difficulty 0" on the UI.
I am assuming this is similar to Lord of the Rings Online's Land Difficulty setting where you can set how difficult the encounters are by visiting a NPC and setting a difficulty buff on your character. My guess is this is initiated when you open an instance of the zone. Just a guess obviously.
Big question is respawns and lockouts.