The symptom was different (a copy/paste issue) but the phenomenon was the same (files with .arc extension not behaving normally). The cause is indeed that Emacs thinks .arc means an archive file. The solution is here:
The variable you need to change is auto-coding-alist, like this:
(push '("\\.arc$" . utf-8) auto-coding-alist)
The reason this problem was so confusing is that the settings in auto-coding-alist take precedence over some of the other things that seem like they ought to work but don't, like
modify-coding-system-alist (described above) or putting a character-encoding directive like:
-*- coding: utf-8 -*-
at the top of the file. Since it was surprisingly hard to track this down and I only found it on my dozen-th or so Google search, I'm making this comment verbose in the hope that the current thread will surface more easily in the future.
