E-O-M
2- In order to provide us with the most good Hashem set up a system where we would be able to choose it. For this to work He gave us the ability to choose evil. Hashem wants us to choose good and He knows we wont always do that. However in His infinite wisdom He determined that creating the world as it is, is for the ultimate good even if bad things happen. Basically, one approach is that Hashem lets bad things happen for the sake of the ultimate good.
In kabala there is a concept of Hashem retracting Himself somehow in order to create the world (whatever that means).