Because whitespace is important. Being able to quickly skim the list and pick out who said each response is important. By adding left and right whitespace it makes the list of messages far easier to scan. It also makes the application instantly accessible from the very first sight; if it were just white and green with no justification, then people seeing the application for the first time would still be confused.
Edit: Returning years later to expand upon this.
99% of text conversations are between two people, not groups. In messaging apps where group discussion is common, just picking out your own comments is not a great reason to reduce the readability in all the ways pointed out in the quetion. But when the conversation is between two individuals, the value of separating the two parties visually becomes more valuable than the readability of the paragraphs themselves, especially when the majority of messages when texting are very short and are unaffected by the shorter format.