As someone else poin out upthread, this is just a variation on the theme of the problem of evil. Frankly, the Problem of Evil strikes me as sort of the atheist’s version of First Cause in that it seems compelling to the person stating it, ultimately, it’s a well known argument and virtually any theist who is interested in participating in the sort of debate in which it will arise probably already has it resolved.
Now, likely, I do think that the Problem of Evil does more or less preclude a theist like a Biblical Literalist, but if they are that, they have much simpler problems to overcome, probably things like Young Earth Creationism and Anti-Evolution views.
Speaking for myself as a theist, I have no issue resolving the Problem of Evil; in fact, it seems to me that though many see the idea of a universe in which evil exists as a contradiction to an omnimax God, I think it’s the exact opposite. That is, the concept of good and evil is utterly meaningless in a context in which there is no choice. It’s not unlike how saying how God cannot be “light” because darkness exists in the universe, but in a universe with no light, not only is the concept of darkness meaningless, but so is this property that has been assigned to God.
In other words, good and evil are moral judgments and they can only exist in a context where moral judgment exists. For example, let’s take a dog and his owner. If that owner trains his dog well, the dog will behave as he’s trained. If he’s trained to be a seeing-eye dog or a rescue dog or a guard dog or attack dog or a fighter or whatever, he’s just following his training. Is it meaningful to judge the dog that helps people as good and the one that hurts and kills other dogs or people as bad? The dog himself lacks the tools to make a moral judgment, it was his trainer that instilled good or bad behavior into the dog, so it is the trainer that ultimately bears the moral responsibility for the behavior of the dog.
It is exactly this logic that says why we can’t only children, mentally disabled, or animals as guilty for acts, because they lack the ability to make appropriate moral judgments. So, I think this same logic carries over to the idea behind the Problem of Evil. That is, the only way for there to not be evil is for us to lack the ability to make moral judgments, and thus, lacking the ability to make moral judgments means that we lack the ability to make moral choices. We may not be automatons, per se, but our decisions would be limited to choosing between vanilla and chocolate, but we’d have no ability to discern any meaningful difference in a dilemma that has moral implications.
So, really, the question isn’t about whether God created evil or was capable of creating a universe in which there is no evil. Instead, it seems to me whether giving man the ability to make moral judgments is worth the very high cost of the existence of evil. Frankly, even without regarding the question of whether or not God exists, faced with the world we have now, or one where we lack any moral discernment or incentive, I think this one is preferable.
Furthermore, if we presume that God exists and is a being able to make moral judgments, then I think morality begets morality. As in, I would judge that a morally upstanding person, when raising a child, doesn’t just want to give that child a set of rules and tell him to follow them, but rather would prefer that the child have a strong moral compass of his own and the ability to make meaningful moral judgments as he faces them in his life. We can act like morality can be summarized in a succinct set of rules, and to a large degree it can be, but it’s easy to come up with a dilemma that means that one has to break at least one of those rules. Rules are great for those getting a grasp on the concept, but attempting to resolve those conflicts can quickly make the rules become needlessly complex. Instead, it is far better to have moral motivations and incentives, being able to tell which ones are more meaningful in which situations and act accordingly. Thus, I’d argue that based on those assumptions, it’s not only non-contradictory that evil exists, but it’s necessary.
Of course, none of this in anyway proves that God exists either. Really, I think that if we’re going to discuss whether or not God exists, I’d rather just see more interesting arguments than “lol evil => no god”.