Ok, here you guys go. When your car is cold, it runs rich in order to act like a choke on a cabureted car. Basically you are dumping more fuel in to allow your car to idle easier. Now, when you dump a 180 degree thermostat in your car, you obviously lower the temp from stock which is 197. There are many things working here. First lowering the temp will send the signal via the ECT that your car is not yet fully warm, and the ECU will very slightly richen the mixture. This is good in one aspect which is that running slightly rich will allow your car to get both better gas mileage and have more power. There are downsides as well though. First of all, all engines theoretically reach their peak efficiency at temps right before the overheat and fail... This means that by lowering the temp you are actually lowering the efficiency of your engine. Also, a drop too low in temp and your car may run in open loop (ie. without reading signals from the o2 sensors and such, like at early morning start). Dont go below a 180 degree thermostat, 160 is just too cold and car wont run as well. Its essentially a measure of efficiency vs. running slight rich, and which one nets more power. It is likely that each car with its own individual conditions will have a different answer for this equation. I run a 197 and get 28 mpg on the freeway, now thats with 2:73 gears still, but thats about the best you ever hear from a 5.0L, because they are (unfortunately) not very efficient to begin with.
They are illegal in California because it does increase unburned hydrocarbon production, and California has strict emmissions (obviously). Larry Sergent is right though everything pretty much is illegal in Cali nowadays. Running at 14.7:1 is what our EEC-IVs attempt to do. This is where the least amount of emissions are released. Running about 10% rich will increase your hydrocarbons (an power) , and running lean will actually drop power, release ungodly amounts of NOx and potentially melt pistons. Hope this helps guys