This wasn’t a useful response, sorry.
I think the answer is Obsidian assumes you want to work with files in the vault, not other files in your system. It is frustrating.
On mobile, it does work the way you expect: select insert image, find image on your system, insert, Obsidian copies the image to your vault and adds it to your note.
On desktop, you have to explicitly move the image to your vault. Either move or copy the image to your vault and then embed it, or drag the image to a note, and Obsidian will copy the image to your vault and embed it for you.
Screenshots can still be pasted into a note.
On desktop, you can