What is Mozilla Location Based Services?
It's a Network Positioning Service, it locates your position based on a database of Wi-Fi hotspots, mobile cell towers, and possibly in the future other sensor data. This database is collected through crowdsourcing by Firefox users that has enabled Mozilla Location Service or has installed the dedicated Mozilla Stumbler app.

It is basically Mozilla's take on geolocation service that is currently provided by Google Location Service on most Android devices. Their objective is to build a public, and more openly accessible, crowd-sourced database for a geolocation service.

Presumably this will be the geolocation service that will be used by Firefox OS and desktop Firefox.

The Privacy Policy for Mozilla Location Service can be found on their website.