If I want that service and someone wants to provide it to me, how is it the role of government to say we can't make that trade?

If I want to take crack cocaine, and someone wants to sell it to me, how is it the role of government to say we can't make that trade?

Sure, hyperbole, but the role of government is to regulate when the externalities of a transaction aren't being accounted for within the transaction.

I'm on board with governments stepping in over externalities, but if A and B make a deal that includes "B will, in addition to observing A's behavior to implement functionality, use these observations to target ads" I don't see how externalities enter into it.

I think the normal reasoning is that services that don’t use data in this fashion can’t compete with those that do. Hence users who don’t want to be tracked have no other options. Whether that bothers you is a personal question.