Sure, the GPL allows it, but the GPL doesnt allow Bob to dictate what Alice does with the source once she has it (GPL v2, term #4). If she decides to distribute it, his recourse is to not do further business with Alice. That could be enough, but if Alice sees sufficient short-term benefit, that may be a risk she is willing to take.

Don't forget not doing further business is not the only recourse someone who builds missiles, nukes, fighters and bombers has.

In fact, considering all possible outcomes, stopping business is the most desirable one.

In other words, the people you sell it to are entitled to the source, nothing more.

The general public, given they are not customers, are not involved.

s/sell/give/

And those rights are automatically passed on -- if Alice sells the product to Bob and he resells it to Carol and she compiles it and gives the binary away to Doug, Doug can call Alice and demand the source.