Could the arc have been caused by bad wire? The outlet was only one
year old, but the wiring is very old. Someone suggested that the wire
is too old and needs to be replaced. If it is charred, can it just be
cut back and used again?

OP said it went when the tenant tried to plug something into it...
My bet would be improperly installed plaster-ears shifted when
the plugh got shoved in, and either cut something, or bridged
two screw-contacts.