I don’t think you actually do know what an IP address is, because at no point in its design or implementation is it intended to designate a specific geographic location. So the question is not why doesn’t an IP address provide an accurate physical location, but how does it provide a physical location at all.
An IP address is just a unique number within a network, assigned to a device connected to that network. On a privately-run network, IP addresses can be assigned randomly, sequentially, or any way the network owner likes.
For an IP address on the internet, an Internet Service Provider is assigned (by ICANN) a range of IPs they can use, and they will in turn *typically* assign specific ranges of IP addresses to specific regions or exchanges (makes it easier for them to manage), and ultimately assign a specific IP address to a specific user for a chosen period of time.
The only thing that ties an IP address to a physical location is 1) which range of IPs is assigned to which region/exchange, which is usually public information, but is accurate anywhere from a street to a large city; and 2) the billing address you provided to your ISP, correlated with any logs they have of which IP address you were assigned at a particular time, which is private information but can be obtained by legitimate (law enforcement, court order) or illegitimate (hacking, leaking) means.
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