What is the difference between component event and application event in Salesforce?

Component Events 
Components events can be handled by same component or component which is present in containment hierarchy (component that instantiates or contain component).
Below is syntax for creating component event.

<aura:event type="COMPONENT" description="Event template" >

<aura:attribute name="msg" type="String" access="GLOBAL"/>

</aura:event>

Below is syntax for firing component events from javascript controller.

var accidentEvent = component.getEvent("newCarAccident"); accidentEvent.setParams({"msg":"New Message!!!."});

accidentEvent.fire();

While handling component events, we need to specify name attribute in

<aura:handler>

<aura:handler action="{!c.handleNotification}" event="c:carAccidentComponentEvent" name="newCarAccident">

Make sure that name attribute is same as that of name attribute while registering the event.

Application Events

This kind of events can be handled by any component which is listening to it (have handler defined for event). It is kind of publish-subscribe modal.
Below is syntax of creating application event.

<aura:event type="APPLICATION" description="Event template" >                                                     <aura:attribute name="msg" type="String" access="GLOBAL"/>

</aura:event>

Below is syntax to file application events from javascript controller.

var appEvent = $A.get("e.c:carAccidentAppEvent");

appEvent.setParams({"msg":"New Message!!!."});

appEvent.fire();

While handling application events, no need to specify name attribute in <aura:handler> 

<aura:handler event="c:carAccidentAppEvent" action="{!c.handleNotification}"/>

Thanks