Steam from cooking foods, spills and moisture can sometimes cause paint to peel and flake off from the inside of your microwave oven. Rust and peeling paint are not really going to affect the function of your microwave oven. Just be sure to cover any food or drink products to protect them from paint chips.
A word of caution: if arcing has occurred and you have a hole in the cavity of your microwave oven, you can only safely use the microwave if the hole is smaller than one of the holes in the mesh screen. If the hole is bigger than that, you need to replace the unit because the microwave radiation (radio waves) may leak out past the hole.
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