Why are profits not guaranteed for firms supplying nonrenewable resources, even though these resources are limited?

• A. Market prices may not reflect the full social costs, leading to overproduction and reduced profitability.
• B. Externalities always increase the demand for nonrenewable resources, guaranteeing profits.
• C. Nonrenewable resources are always perfectly elastic in supply, so firms can set any price.
• D. Government subsidies always ensure high profits for nonrenewable resource firms.

Answer: (A)

Verified step by step guidance

1. Understand that nonrenewable resources are limited in quantity, which might suggest scarcity could lead to high prices and profits.
2. Recognize that market prices for nonrenewable resources may not include external costs, such as environmental damage, which are social costs not borne by the firms.
3. Realize that when external costs are not reflected in prices, the market tends to overproduce the resource, pushing prices down and reducing potential profits.
4. Consider that overproduction due to ignored externalities can lead to depletion and lower prices, which means profits are not guaranteed despite resource scarcity.
5. Conclude that factors like externalities and market imperfections explain why limited resources do not automatically translate into guaranteed profits for firms.