Various forms of questions reflect various assumptions. That this case asks whether Nelson should send the report to Jason implies that the report has not been published in any way and that the question of whether to send the report is Nelson's to answer. If the research had been funded by an outside source, then that source might have to give its permission for the report to be circulated, and if the report had been published, Jason can track it down himself and need not be dependent on Nelson for anything other than, perhaps, the information that the report has been published. So the way the question is posed suggests that the report is Nelson's to do with what he sees fit. If he prefers that others not read it, that is for him to decide.
He certainly has no obligation to send it to Jason even though Jason worked on the project. Jason's leaving the project before the work was completed removes any obligation Nelson might have had.
But it is not obvious that any harm could come from Nelson's sending Jason a copy, and, after all, Nelson is a professor, Jason was his student, both are presumably in the same area, engineering, with Jason going on to graduate school; and so Nelson may properly feel that it would help a former student to give him a copy of the report. One may argue that one never loses a student. They can always ask a professor to write a letter of recommendation, though it may become more and more awkward the older and more removed from college they get, and so it is appropriate for Nelson to continue what part of that relationship he can by encouraging Jason. After all, it is a compliment to have a former student request a copy of something one has worked on, and since, we assume, Jason was one of Nelson's better students (for why else are we to assume he was chosen as student assistant), Nelson may properly feel that Jason would be an asset to the profession and so want to encourage him.
If Nelson later discovers that Jason has used the report for his Master's Thesis, he has an obligation to report that--to the advisor listed on the Thesis, to the chair of the Department of the university in which the thesis was given, and to the University itself. He may also have an obligation to report it to whatever legal body is responsible for ethical issues in the profession. Jason is effectively stealing someone else's work, and he has no right to do that--even if, as Nelson indicated, Nelson has no further interest in the report and so does not intend to publish it. In addition to taking Nelson's work, Jason is also misrepresenting that work as his own. He is thus effectively lying to the Department and the University and his advisor there. And, in addition, he is misrepresenting himself as someone capable of doing that sort of work--to the University and to any future employers who see that he got a Masters from that university. He may well be capable of such work, but it is not fair to those who have done the proper work for a masters to represent oneself as having done it and compete with them on an apparently equal footing for honors and jobs.
It is not clear what Nelson could have done to prevent this from happening. He might have put on the Report "Common law copyright" and "Not for publication," but such stamps, even if duplicated at p. 100, as libraries do when they print their names on the books they purchase, would not prevent anyone from typing up the entire report again.
He could also refuse to circulate unpublished papers and reports, citing concerns about having his ideas taken without credit to justify this closed-door policy. What he has to weigh here is whether such a policy properly furthers knowledge. If he indeed did not intend to pursue the subject of the report, then it would have languished in his filing cabinet until he died, then, probably, to be tossed. He worked on the project and may have uncovered something he did not realize he had. Circulating one's unpublished papers has the advantage of helping to ensure that whatever goodies are buried in fact make the light of day. He also has to weigh that consideration, which is a matter of general policy about the point of doing research, against he judgment that Jason might well profit from reading the report. After all, if Jason is now having second thoughts about how he handled himself in that project, then giving him the report to read so that he can see how things turned and thus what he missed out on by not doing a better job in the project may be just what Jason needs to mature further. Cutting him off may be taken as an affront and may be unhelpful in furthering his growth as an engineer and as a person.
It is not obvious what answer one ought to arrive at when going through such a calculation. It is one thing to keep to oneself what papers one has that one is working on and intends to publish. Premature circulation of an idea can work against the dramatic impact of its sudden publication and risks its loss as well. But if one has decided not to pursue a project, it is not obvious that keeping a report on the project to oneself is justifiable. It would be if one knew ahead of time what Jason planned to do, but one does not.