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It's wrong. Period. It's Affirmative Action for well-to-do white kids.
Public schools like UC Berkely should not have legacy and they don't.
Private schools rely heavily on private donations should be allowed to have legacy. Private schools are non-profit business and they should be allowed to survive.
You know, I've read the articles, and I understand the resentment felt by people who feel that legacies have an edge they themselves lack, but I really feel this is overblown. There are lots and lots of legacies with decent stats that don't get in to the Ivy-type schools; that there are 10% legacies at a given school does not mean that all of them got in, despite inadequacies, because they were legacies. Far more likely, IMO, is that kids whose parents went to the school, apply and attend because their parents liked the school; most of them, probably the great majority of them, had offers from similar colleges but went to their parents' school, not because it was the only one that would have them, but because they (and their parents, who are shelling out the cash) have good associations with them.
Bottom line, I think your public/private distinction just doesn't hold water.
I've heard too many stories of rejected or waitlisted legacies with stellar stats to think that being a legacy is a magic bullet.