The development of dedicated small animal PET (positron emission tomography) scanners has led to significantly higher spatial resolution and comparable sensitivity to clinical scanners. However, it is not clear whether we are approaching the fundamental limit of spatial resolution. This work aims to understand what is currently limiting spatial resolution during data formation and collection and how to apply that knowledge to obtain the best possible resolution for small animal PET without sacrificing sensitivity. Monte Carlo simulations were performed of the interactions of a 511 keV photon in a variety of detector materials to evaluate the modulation transfer function of the materials. Positron range, non-colinearity and pixel size were modelled to determine the contribution of additional components of data formation and collection on the complete modulation transfer function of a PET system. These simulations are shown to predict the intrinsic detector resolution of current high resolution systems very well. They also show that current detectors are not limited by inter-crystal scatter. An intrinsic resolution of 0.5 mm can be achieved, but would require a detector with a pixel size of around 250 µm that can be read out unambiguously. It is shown that a range of different detector materials, both scintillators and semiconductors, can be used in these high-resolution detectors. While this design relies on thin (~3 mm) pieces of material, stacks of the material are shown to simultaneously provide spatial resolution near 0.5 mm and 60% efficiency. This work has shown that detectors with significantly better resolution and sensitivity can be developed for small animal PET applications.