God allows evil so that greater good may come. The greatest example of this is Jesus' triumphant death and resurrection.
Why did God create beings with free will that could rebel against him? One partial answer is that beings without free will would be robots. Beings with true intellects and wills are immeasurably greater creations than robots since they can think, choose and, most importantly, love.
Additionally, beings with free will are afforded the opportunity to experience eternal joy with God in heaven by virtue of Christ's sacrificial death on the cross. The difference between earthly suffering, and even death, to eternal life with God is like the difference between the finite and the infinite. There is no comparison.
An exhaustive yet concise treatment of the problem of evil here.
> God allows evil so that greater good may come.
Hmm. One woudl think he'd be able to crank out that "greater good" on command. Yet another example of an imperfect designer...
> Why did God create beings with free will that could rebel against him?
Sadism seems to be the answer if one reads the Bible. God *wants* most people to go to Hell (this woudl explain Liberals and Creationists).