and discovering Romeo's dagger will help her accomplish that goal. Essentially, Juliet is pleased to find the sharp dagger because she knows that she can use the weapon to commit suicide, which will finally bring her peace and comfort. Juliet then metaphorically compares her body to a sheath, which is a covering for a blade or knife. By referring to her body as a sheath, Juliet is suggesting that her flesh will be the dagger's final resting place. Juliet also acknowledges that her blood will also cause the dagger to rust once she stabs herself. Juliet then takes Romeo's dagger and commits suicide by stabbing herself before the watchmen arrive.

A dagger or sword or any metal weapon, if not maintained, will rust.  In Shakespeare's day, sheaths were leather, and if the metal weapon was left inside unused or unmaintained long enough, the acids from the leather would corrode, or "rust" it. Similarly, if blood was allowed to remain on the metal after stabbing, and not wiped off, that would etch or "rust" the metal, leaving hemoglobin stains. Shakespeare employs a brilliant image in implying that the dagger will never be removed from its sheath, or Juliet's bosom, and therefore will rust; the word also suggesting the eternal decay as is previously mentioned.

It means she's going to kill herself. Juliet's chest becomes the dagger's sheath (place you store your cutlery). "There rust and let me die" refers to the eternity of rotting death they will spend together. She calls it happy dagger somewhat ironically, since it's giving her what she wants, but it is still killing her.