Why anchor tag does not take height and width of its containing element

use display:inline-block in anchor

.gallery a{
    display:inline-block;
}

here is updated jsFiddle File

also remove margin from image and add it to anchor

.gallery a{
    display: inline-block;
    margin-left: 20px;
    margin-top: 20px;
}

The CSS 2.1 spec says

The dimensions of the content area of a box — the content width and content height — depend on several factors: whether the element generating the box has the 'width' or 'height' property set, whether the box contains text or other boxes, whether the box is a table, etc. Box widths and heights are discussed in the chapter on visual formatting model details.

The <a> element defaults to a display value of inline. Its contents participate in the layout so it is a non-replaced element.

For height, the spec says:

10.6.1 Inline, non-replaced elements

The 'height' property does not apply. The height of the content area should be based on the font, but this specification does not specify how.

So 18px is arrived at from a single line of text, taken from the font metrics. Neither the larger image content, nor the containing block size plays any part.

For width, the spec says

10.3.1 Inline, non-replaced elements

The 'width' property does not apply. A computed value of 'auto' for 'margin-left' or 'margin-right' becomes a used value of '0'.

in other words, the width is determined by the <a> element's contents, paddings, borders and margins.

For the first <a> element that's 114px (contents - image plus one space) + 20px (left margin) + 2x5px (left and right border) = 144px

For the second <a> element that's 280px (contents - image) + 20px (left margin) + 2x5px (left and right border) = 310px

Just need to account for the spaces. The elements are being laid out in a line box in a inline context, so the spaces at the start of the first <a> element and at the end of the second <a> element are being dropped. The spaces at the end of the first <a> element and the start of the second <a> element are being collapsed into one space. When spaces are collapsed, it's always the first space which remains, which in this case is the one at the end of first <a> element, so that's why a space participates in the width of the first <a> element but not in the width of the second one.