• Are you reporting a bug, or opening a feature request?

Bug

• Please insert below the code you are checking with mypy,
  or a mock-up repro if the source is private. We would appreciate
  if you try to simplify your case to a minimal repro.

from typing import Generic, TypeVar, Union

F = TypeVar("F")

class Z(Generic[F]):
    y: F
    def __init__(self, y: F):
        self.y = y


def q2(x: Union[Z[F], F]) -> F:
    if isinstance(x, Z):
        return x.y
    else:
        return x

def q3(x: Z[F]) -> F:
    return x.y

p = Z('hi')
reveal_type(p) # Z[builtins.str*]
reveal_type(q2)  # def [F] (x: Union[Z[F`-1], F`-1]) -> F`-1
q2(p)  # error: Argument 1 to "q2" has incompatible type "Z[str]"; expected "Z[<nothing>]"
q3(p)  # No error

• What is the actual behavior/output?

When creating a generic function that has a signature where one parameter is a union on a generic of a typevar and that typevar, calling with the generic causes an error.

• What is the behavior/output you expect?

Z[F] satisfies Union[Z[F], F]

• What are the versions of mypy and Python you are using?
  Do you see the same issue after installing mypy from Git master?

Python 3.6.6, using mypy 0.660; same issue happens with master.

• What are the mypy flags you are using? (For example --strict-optional)

No flags