A game's physics engine defines how an object's graphic model interacts with the game world environment. It is usually intended to give the player a semi-realistic simulation of real physics (force, gravity, inertia, etc.) to help immersion in the game's world.
For instance, in World of Warcraft, some level of real physics is modeled in accelerating falling, jumping from place to place, or swimming.
On the other hand, in World of Warcraft, some mobile models can pass through each other (no collision).