I don't know if happy is the correct word I'd use to describe the ending, but it's ridiculously satisfying and cathartic.
I also love how throughout the film we see that every single person, even the girl in the wheel chair, are bad folks. And if Tom hadn't been killed I probably would have hated the film.
As for the baby killing, Lars von Trier loves to embrace taboos rather than ignore them for the sake of the industry. And if Grace would have taken it to raise it by herself, that would have been so lame and tacked on. Especially since it doesn't fit her character.
Plus Grace was invoking her wrath upon dogville, it was like a unstoppable force of nature that swept through the town, literally blowing them away. Are babies lives always spared in these situations? No.
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