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I wouldn't say that Varian's diagram is wrong: it's more that his explanation of the $MC_F$ function (see 34.3 on p 652) is incomplete (and to be fair textbooks do sometimes need to simplify matters in order to focus on key points). This is how I would analyse the effect on the fishery of changes in the quantity of pollution. The fishery's profit function is:...


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You are both right. Varian doesn't include the $f$-argument in his $MC_f$ function, so his graph is correct if that function is your red one. Note that he nowhere claims that his $MC_f$ function shows the one of the fishery before integration.


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