How much money would they make with people using PS1-2-3 discs to play those games?

While Sony can sell subs for the Classics.

Always said it should be possible but have been told it wouldn't be because o the PS5 disc drive lacked the function to play CDs and DVDs...

If I can play all my PS disc from 1 to 5 I'll honestly consider doing it, I would rather not have a hacked system (I actively unhacked my PSP and PS Vita when I bought them used and they had it), but Sony is so full of shit nowdays that they really deserve it.

Let's see how it goes, as I might never get a PS6 making my PS5 able to play all my games would be very tempting.

You'd think they would only make more money by allowing older games to be playable natively on PS5, even if it has to be done the way Microsoft did it. I was primarily on PS3 back then and there's games I never played, but add in the people who weren't around or too young or not into gaming at the time but are now, that's still a large audience.

Since the Xbox backwards compatibility started, I got more interested in Xbox and that even sold me an Xbox One and later a Series X, I benefited from the Games with Gold, even rebought some of my favourite PS3 games that were also available on Xbox 360, some 2nd hand physical and some digitally. 

That seems like a win-win to me, I get more choice of what I want to play across generations and they benefit from making old games available to a wider audience than before. Compared to Sony's approach with PS3 on PS5 which apparently requires a bunch of old PS3's to power the servers for the cloud gaming that hardly anyone is interested in. Doesn't seem like a long term solution to me. I'll never forget how crappy Uncharted 2 looked through PS Now and that was one of the best looking games on PS3! Whereas Red Dead Redemption 1 on Series X holds its own against many current titles!

It's nice seeing these disks run on more (modern) hardware.
I think the original PS3 (60GB) was the only console that was backwards compatible with PS2 disks.

As for why Sony didn’t support this, I suspect money played a big part. If people could use their existing discs, Sony would find it harder to sell digital copies, and Sony would find it harder to lock customers into their ecosystem.

There's no way to play PS1 and music CDs on PS4 and PS5 because Sony removed that feature on an engineering level.
DVDs can be played. Sony absolutely locked PS2 disc support away because they don't want people using PS2 discs to get a digital copy installed for free or a lower price than on PSN.
The issue is that Sony would have to bypass the security of the PS2 disc for the data. I'm pretty sure Xbox and Xbox 360 games recognize the security for the sakes of backwards compatibility without going through it (jailbreaking it).

Sony learned quickly that there is no punishment for locking you out of BC for the sake of selling remasters and subscriptions. If customers tolerate something, business will do it. It's really that simple.

PS5 plays DVD's just fine. I use it from time to time to play DVDs

^ this.   PS2 and PS3 games should be something it can read.

I have no idea about CDs? but how many bluray players cannot also read dvds or cds? It probably has parts that can as well imo.
Its likely just a matter of software and allowing it.

Yeah everything that plays Blu Rays can play DVDs. PS4 and PS5 do not play CD's however.

It's done using an emulator. If you look carefully, you'll notice it's using PS5SX2, which seems to be a PS5 port of the ages-old PCSX2 emulator. I wouldn't bet my money on Sony itself utilizing PCSX2 anywhere, but I could definitely be mistaken.

If I recall correctly, during the last years of PS3, there were reports that Sony had got software-based emulation of PS2 games working on PS3. If that's true, it would mean Sony just never bothered to release the support. Come PS4, they ditched all backwards compatibility, except for some Store releases, I guess.