You're making big assumptions here regarding students desires to attend stanford. Ignoring everything else though, having two elite universities that cater to merit is better than one just for the sake of doubling the number of students.

> Ignoring everything else though, having two elite universities that cater to merit is better than one just for the sake of doubling the number of students.

Not for stanford. Its goals largely boil down to increase the endowment and create a powerful alumni network. Accepting legacies is a great way to accomplish both those things. This is the same reason schools give preference to athletes even though it brings down the schools academics. Competitive athletics requires skills that translate very well to the workplace(grit, teamwork) so successful athletes are likely to become successful corporate workers.