Can humans live happily in space?

The next step towards space colonization should try to confirm that it is indeed possible for humans to put up infrastructure in space where they can keep themselves occupied and form lasting social groups. The ambience they create should be such that they feel like staying there rather than hurrying back to earth.

Two scenarios are possible:

1. Create human settlements on the Moon. There should be at least three such settlements, operating independently, so that they can try out different ideas and create a feeling of community. Each settlement should be spacious and accommodate from 100 to 1000 people.

2. Set up minimum facilities on the Moon and aim to create three space habs, holding 1000 people each.

The experiment with Biosphere 2 seems to indicate that there should be plenty of vegetation to ensure adequate oxygen supply. So any containment (which will have to be hermetically sealed, naturally) should be really spacious.

The question is whether it will be cheaper to have the settlements on the Moon, or in Space Habs?

Selvaraj