Does not such a retake system seem potentially unfair? Say C is the threshold for a retake. Someone who got a C the first time and an A the second time (avg = 3.0) would be better off than someone who got a B- (2.67) the first time around but wasn't allowed to retake. Small things like this may not matter that much, but at the margin, there's a difference. Some will figure out that a CC is an option, but those that don't realize will just have to settle.
Wouldn't this encourage moral hazard for a kid to purposely slack off on the final once he realizes he can easily fall below the threshold for a retake? Granted if someone's getting Cs, they aren't going to make As easily the second time around but there's still something to be said for seeing the same material a second time, especially if the reason for the bad grade was sickness and the kid already knows a portion of the stuff well.
In all honesty, if Princetonians were allowed to retake classes limitlessly, then damn, our GPAs would be higher than those at Harvard, which is saying a lot. Adcoms will see retakers as having "tenacity to overcome difficulties, blah blah" while others are stuck with their Bs.