If advertisement is paid per click, and not per impression, Google itself is interested in better targeting of what to display to whom, because it frees up inventory without impacting revenue.
But you don't have fewer impressions. The number of ads you display doesn't change, you can display just as many targeted ads as you can untargeted ones. If each of the targeted ads has a higher conversion rate, the number of clicks goes up without ever changing the total number of ads you display.
The number of impressions Google has to sell in total is determined by the number of pageviews. They still have to optimize what to show to whom. (And of course, make people view their pages more often.)
