The second scenario is not worth considering as an effective language-learning environment, no matter how "immersed" the participants may be. They will find ways to either subvert it outright or will continually have their heads running in their native language, thus nullifying any benefit that is supposed to be derived from the expensive geographical transplant.
Yes, go overseas, abroad, immerse yourself -- but note that last word: your SELF. There is nothing magical about being overseas, abroad or immersed. I taught in an overseas program where most participants could have immersed themselves (adults) as I advised them to do, but they were just so interested in socializing with each other that the environment and living circumstances became an obstacle to their parties. I taught in an intensive program, in the US, where some people could not take the pressure -- and we let them out on weekends to play golf...
As an experiment to test the notion of geography versus psychology, I once immersed myself in Spanish while living in Washington, DC. My colleagues were Spanish speakers at a university and at the time, much of my social life revolved around that group. My dry-cleaner was Korean, so I couldn't speak to him anyway. My grocer was also Korean, but had so many Spanish speakers working for him that he had actually taught himself Spanish! As for my bank, the ATMs already offered Spanish on the menu. TV stations in Spanish, movies and magazines, all were easy to get. I immersed myself for eight weeks, and realized that if one speaks Spanish, even in the US capital, it is possible, even if quite limiting, to live one's life without a word of English.
Depending on the language you are studying, many of the same conditions that make for successful language learning in a study abroad program can be found -- or created -- right here at home, and for a lot, lot less -- because you don't have to leave home. As the great Spanish intellectual of the 1600s, Francisco de Quevedo observed, "One does not improve one's lot by changing one's country, but by changing one's habits and ways."