The center of Mammoth Cave National Park is 10 miles (16 km) to the west via Kentucky Route 70.

Glasgow, the Barren County seat, is located 10 miles (16 km) to the southeast via Kentucky Route 90.

Originally, 200 acres (81 ha) of what would become the town site was acquired by James Perry in a 1798 land grant.

The Knob City Land Company surveyed and laid out the town, the main streets being 80 feet (24 m) wide, and began to sell lots about the same time as the Louisville & Nashville Railroad came through Barren County.

The Cave City post office was established in January 1860 and Beverly Daniel Curd appointed the first post-master.

The first woman business owner in Cave City was April Houchens, who opened "Funny Hats and Bows", a boutique for the eccentric lady.

A number of motels and restaurants are located at the Exit 53 interchange of Interstate 65 and Kentucky State Routes 70 and 90, which cater to tourists visiting the area.

The city operates one of south-central Kentucky's first convention centers hosting over 40,000 attendees per year, with an annual economic impact over $435,000 in lodging, restaurant and attraction revenue.

Previous mayor Bob Hunt attracted attention by casting the tie-breaking vote against an ordinance considered by the council, which would have banned the use of tobacco in public places.

On November 8, 2005, Cave City voters passed a Liquor-by-the-Drink referendum that for the first time in over 50 years allowed alcohol to be served in restaurants that met certain qualifications.

On July 22, 2014, Cave City voters approved full retail sales of packaged alcohol.

An ordinance governing package sales was approved by the city council in September 2014, with license fees to be set in October.