What is Basic difference between Application Event and Component Event in lightning component?

Component Events

A component event is fired from an instance of a component. A component event can be handled by the component that fired the event or by a component in the containment hierarchy that receives the event. The component that fires an event is known as the source component. The component that fires an event can set the event’s data. To set the attribute values, call event.setParam() or event.setParams().

Application Events

Application event in simple words can be used in multiple components and component that has the handler for the event will be notified. To create a custom application event, you need to use the <aura: event> tag in the event resource. You need to define the type=” Application” tag. To use you need to register application event same way as the component event.

To fire the application event you need to use event.setParam();

Events are of the most widely used in lightning component. So when you should use which one is also important.