He could, but He chooses not to. When He gave us free will, He really meant it. He also meant for us to exercise it for the good, and not for evil - even though the consequences can be horrible. Supernatural grace is available to us to avoid or correct such evils - but we do not make good use of it. We are foolish and prideful in thinking the world should be better, even though we ourselves fall short of living genuinely virtuous lives. What do we really expect? We reap what we sow. In a world that, by and large rejects God, we reject God's grace, and then blame him for what are our own selfish acts.
I am sure I'm going to regret taking the bait, as this is the ultimate in futile arguments, arguing over someone's religious faith, but that's the bit that least makes any sense to me about most religions.
Just the sheer arbitrary pointlessness of the whole exercise from God's point-of-view. At least with the "the universe is all a simulation" idea, one can comprehend the possible motivations of the creators - either it's all a game for their amusement, like an Elder Scrolls title (without all the bugs, or at least without most of them), or it's experimental psychology, making bizarre and unpleasant things happen to people in order to study how they react, in order to apply that knowledge in their 'real' world.
But the story above just baffles me - God created us, gave us 'free will', set up an immensely complex set of physical and social circumstances for us to negotiate (each of us starting from seemingly random start points, knowing nothing, and being expected to work out from scratch what the heck is going on and what we are supposed to do, before it's too late), then arbitrarily punishes us for all eternity if we get it 'wrong'. Worst. Game. Ever.