A cemetery is used as a resting place for citizens that have passed away. When a citizen dies, if there is room, a grave will appear in the cemetery. Cemeteries are variable sized - you can have large cemeteries with many graves, or small plots wherever you like.
When a citizen dies, their children and spouse lose happiness. If a spot for a grave in a cemetery is available, the happiness loss won't be as severe. This happiness loss will be recovered over time if the citizen is in an happy environment.
Tombstones will decay after many years, allowing reuse of a full cemetery. Care must be taken in placement of a cemetery. If a cemetery is removed, the tombstones will remain and decay naturally. Only then can the area be used for other purposes.
Citizens living near a cemetery will get a slight happiness boost.
Although the game specifies that the cost of a graveyard is 1 stone per unit of length, the actual cost of building it is slightly different, and can be viewed here.
If the tombstones decay with the time (years), the expectatives to built a big (optimal) graveyard would be considered join to this time decay (graves available).
Patch 1.0.2 changes
- Tombstones now decay in 4-6 years instead of 13-17.