1) Because desirable internships have more candidate applications than available slots. E.g. Google has 40,000 students wanting an internship but only 1500 slots.[1] With that supply & demand ratio, Google can be selective via difficult coding tests.
2) Even though internships are unpaid, companies evaluate interns to potentially offer permanent employment. If so, a company like Google would want to fill those 1500 slots with "the best" rather than randomly pull from 40000 candidates.
That's how it is at the hot tech companies. Maybe other internship programs outside of tech sectors such as Peace Corps think of interns differently.
[1] https://www.fastcompany.com/1683136/how-to-actually-land-an-...
Code challenges at least have the capability of being very useful. We try and present the type of problems people will have to be solving in that position; if they struggle with it and someone else excels, they have done their job.
Cool, we can finally remove CompSci degrees from job postings.
"Hi, we are not going to pay you, or not very much, but please be at the same level as senior that are already working for us"
I had interns back in the day I had an office (and not working from home) and I always made them work on basic tasks under my supervision. Once I had one woman who was very good, and she worked on a website that ended in production, but most of the time the purpose was to work on internal projects that can be used even if not perfectly polished. You know, stuff you always say you're going to do some day, but you don't.
The advantages were on both sides. They learned real life cases, under my supervision, and I had the tools I didn't.
Disclaimer : I'm French so maybe my example is not relevant.