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Is this because the positive ions on the N type side are canceled out by the free electrons from the donors and that the negative ions on the p type side are canceled by the holes or is it because the n type and p type regions have an equal amount of holes and electrons that zero out the E field outside of the depletion region?

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It's because there are free carriers. When you have free carriers, the electric field pushes them around until they cancel it. The depletion region can support an electric field because it doesn't have free carriers in it.

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