You need to honour the booking @Laurel234, they legitimately booked before the other guest extended. It's not your fault if the guest wasn't quick enough to accept the extension.
Host cancellation carries penalties and isn't worth it in this case.
Hopefully you have a cleaning fee to cover the additional costs of changing guests?
If the new booking doesn't start right after the other, perhaps you can still extend the original booking a little bit (they'll know they have to accept quickly this time!)