Because you don't need to cast "melted ice" (water) in order for the ice to melt and put out the fire. Have you ever tried putting a block of ice on a campfire? Either the fire will be put out, or the fire will subsist, all the ice will melt, and the water will boil. The outcome depends on the relative quantities of said "elements".
Okay, so which is it? Should the world have "unreal physics" (a term which you fail to define, by the way)? Should it have real physics (where imbalances in heat energy tend to balance themselves out, and a fire cut off from its oxygen supply dissipates)? Or should it follow rock/paper/scissors game rules (which have nothing to do with physics)?
Actually, the elemental system in this game doesn't really work that way. Saying that it operates on a rock-paper-scissors system is only correct when you implement different enemy types into the equation. When it comes to two mages battling one another, whichever one is using lightning should most likely win (assuming all other variables are equal), because lightning is the anti-mage element. On the other hand, frost is anti-melee, and fire is general purpose.
I understand what your saying and can see how my post sounds contradicting...
What I meant by "unreal physics" is that by glitch or otherwise, there's many instances that the game breaks the laws (I don't think I need to cite details as the game's chock full of them); so by working within this game's mechanics of "real" and "unreal" physics you can use both to simplify events. I think the "this beats that" should apply only if both elements are equal strength but obviously a frost dragons breath shouldn't be halted by a blast of flames spell.
So on equal levels my rock/paper/scissors, circle of life is viable within this setting.....tag
