Jesus wanted Nicodemus to see that his confusion was not reasonable for a man in his position. Nicodemus taught Israel, yet he could not follow a teaching about the new birth. Barnes says the doctrine "was not new, but was clearly taught in the Old Testament," so it "may seem surprising" that a teacher would be a stranger to "so plain and important a doctrine." Gill describes Jesus as "upbraiding him with his continued and invincible ignorance, which was aggravated by his dignified character." The question is a firm correction, but it comes inside a long, patient conversation, not as a dismissal.

Nicodemus says nothing more in this conversation. Jesus keeps teaching: "We speak that we do know, and testify that we have seen; and ye receive not our witness" (John 3:11). He goes on to speak of the Son of man who "came down from heaven" and must "be lifted up" so that "whosoever believeth in him should not perish" (John 3:13-15). John later shows Nicodemus again: he asks the council, "Doth our law judge any man, before it hear him?" (John 7:51), and after the crucifixion he brings "a mixture of myrrh and aloes" for Jesus' burial (John 19:39).

The KJV word "master" means teacher. The Greek is ho didaskalos, "the teacher," with the definite article, which is why the ESV reads "the teacher of Israel." Barnes points out that it is the same word translated "teacher" in John 3:2, where Nicodemus had called Jesus "a teacher come from God." Now Jesus turns the title back on him.

Gill says Nicodemus was one of the "wise men, or doctors of Israel." He also says the Old Testament had already described this inner change, for example as a "circumcision of the heart" (Deuteronomy 30:6).

This question shows that being born again was not a strange new idea that Israel's teachers could not have known. God had long promised to change hearts from the inside: "the LORD thy God will circumcise thine heart" (Deuteronomy 30:6). Jesus expected a teacher of Israel to recognize that promise when he heard it.

The question also shows the patience of Jesus. He corrected Nicodemus, but He did not send him away. He kept talking and gave him some of the clearest words in the Gospel (John 3:14-16). The seed seems to have grown. The man who first came "by night" later spoke up for Jesus before the council and helped honor Him at His burial (John 7:50-51; John 19:39).