limiting the amount of academy spots will just mean that less local players will get chances at top clubs as they will have to make space for the better prospects from other clubs. That's a bad idea.

You can try to limit the number of academy transfers a club can make , but then again that might hinder the development of good prospects in the less prestigious academies. I think this is the best option but it needs a good balance.

How great would Sancho have been if he stayed at Watford playing first team rather than leaving for City?

He would've been worse if anything. As far as I know Watford's academy can't compare to City's, and he managed to get a move to a top club with a great reputation of developing youth. Might not have happened if he didn't play for City.