Because we are planetary creatures, most people assume the first and most numerous space settlements must be on the Moon or Mars. Like many unexamined assumptions, this may not be quite right. In fact, we may live in orbit long before settling the Moon or Mars, and there may always be far more space settlers in orbit than on any planet or moon. In case you haven't heard of them, orbital settlements are huge spacecraft, big enough for many thousands to live in comfortably, that provide radiation protection, a breathable atmosphere, nearly self-sufficient life support, and that rotate to provide something that feels much like Earth-normal gravity at the rim (in the center you're still weightless, this is important).
Why do I think orbital settlements will precede and vastly outperform those on planets and moons? Three reasons:
Location is also critical for economic self-sufficiency. Thriving communities beyond Earth can't be an endless drain on Earth's economy, they must provide goods and services for Earth for a long time to come. Settlements in Earth Orbit can provide energy, exotic materials, and a tourist destination for earthlings. Nearly unlimited, clean, base-load electrical power can be provided by solar satellite power (SSP), giant solar arrays in orbit that beam energy to Earth. While SSP is too costly today, the space infrastructure required to build orbital space settlements will make SSP very inexpensive indeed. Some asteroids in orbit near Earth have vast quantities of valuable metals -- one small Earth-approaching asteroid has been valued at $20 trillion! Finally, Earth orbit is already a tourist destination, and studies suggest that the space tourist market is around $50 billion/year (five million flights at $10,000 per). The Moon is also a reasonable tourist destination, but lacks the killer-app -- weightless sex (see "Sex in Space" by Laura Woodmansee) -- and is harder to get to. Lunar power for Earth is possible, but requires relays to get the energy to Earth and suffers from a two week night. Mars is too far away to supply power, materials, or a significant tourist destination. Earth orbit's location is a huge advantage if you want to build thriving communities in space.
To be fair, in one way, orbital settlements are more difficult to build than communities on the Moon or Mars. Access to materials is much more difficult. Millions (not billions as some have suggested) of tons of lunar or asteroidal material must be brought into Earth orbit, but that is just difficult, not impossible. Furthermore, it only matters for the early settlements. Later settlements can be constructed near an asteroid to supply the bulk of the necessary materials.
While the Moon and Mars have an advantage in materials, orbit has continuous, ample, reliable solar energy. In most orbits there is a continuous supply of solar energy, which gets stronger as we move closer to the Sun. Even settlements in Low Earth Orbit (LEO) only lack sunlight for 40 minutes at a time and can be supplied by energy beamed from solar power satellites in sunnier orbits. The Moon and Mars both suffer from night time and the Moon's night is two weeks long! Mars has reasonable length nights, but also features dust storms, an atmosphere, and is much further from the Sun thus requiring much larger arrays for the same power. Thus, for self sufficiency both the Moon and Mars require solar power satellites and/or nuclear power. Nuclear power is fine for small bases and short stays, but for a civilization of millions, importing nuclear fuel from Earth is completely impractical. Local sources of fuel must be found and, if those currently used on Earth are not available, new forms of nuclear power must be developed. In either case, mining, separation, transportation, and processing will be needed, a significant task not necessarily easier than bring lunar or asteroidal materials to Earth orbit.
Finally, there is a smooth path from where we are now to orbital settlements. Today we have the International Space Station (ISS) in orbit and Bigelow Aerospace is flying Genesis I, the first privately financed space station. Bigelow has also committed to flying a private station capable of hosting three people within a few years. It doesn't take a lot of imagination to get from there to orbital hotels serving up the killer-app (remember, weightless sex) on a daily basis. As space hotels get larger and more elaborate to service millions of earthlings sampling the delights of space, it may make sense to rotate parts of them to gain pseudo-gravity just to simplify certain aspects of living (think bathroom). From there it's a short step to low-g facilities for the handicapped -- no wheelchairs needed. By this time there may be long-term employees amongst the staff that would rather live in orbit than return to Earth. It will be time to build the first true space settlements -- thriving communities beyond earth where people live and work -- and raise their children, the first space natives. Note that while government support would certainly be helpful, this is primarily an private industry, private money, entrepreneurial approach to space development.
This enormous area becomes available because of fundamental geometry. On planets you live on the outside of a solid sphere. Because planets are three-dimensional solid objects, they have a lot of mass. By contrast, orbital settlements are hollow (you live on the inside). Most of the materials are in the exterior shell for radiation protection. This is why a relatively small body like Ceres can supply materials for living area hundreds of times that of our home planet.
This has tremendous implications. The Earth holds about six and a half billion people at present, and is considered very crowded. However, most of our planet's surface is nearly uninhabited. The oceans, of course, have almost no one on them. The frozen wastes of Alaska, Canada, and Siberia have extremely small populations, as do the vast deserts of Africa, the Middle East, Central Asia, the Western United States, and Australia. By contrast, all of an orbital settlement's area can be more-or-less any way we want it, from the temperature to the rainfall. Thus, it is reasonable to expect that orbital space settlement in this solar system can support a population of ten trillion or more human beings living in excellent conditions.
A large orbital space settlement can be rotated to have nearly any pseudo-gravity desired, including 1g. This means that children raised in orbital settlements should have no problem visiting Earth. Unfortunately, the same cannot be said for those raised in low-g.