As you point out, the biggest disadvantage to placing an observatory on the moon is the cost. Other difficulties include protecting the telescope's optics from lunar dust as well as the moon's slow rotation; parts of the sky will be invisible for up to two weeks at a time.

Hubble's successor, the James Webb Space Telescope, is scheduled for launch in 2014. Unlike Hubble, it is optimized for observations at infrared wavelengths, and for this reason it is being placed over a million miles from Earth, opposite the sun at the semi-stable "L2" point, and is equipped with a heat shield to keep infrared energy from Earth and the sun from overwhelming the telescope's sensitive detectors.
Source(s):
http://www.jwst.nasa.gov/
http://www.jwst.nasa.gov/orbit.html

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