Experience Blocks are hard caps: you don't gain expirience from monsters 5 levels below you. Monsters above your level give normal exp.
Some Experience Blocks also disable monster(5 level below) loot to discourage low-level farming of mobs.

Experience Penalty is a soft cap: you gain x% of exp from monsters 5 levels below you, where x% lowers as difference grows. Typically monsters above your level also give bonus x% exp to compensate for difficulty.
Monster loot is typically not affected, but some might boost loot of monsters above character level.

The first type of cap is typically created to avoid grind-gameplay and force player to face more challenging mobs(at their level for maximum exp gain). More challenging/hardcore gameplay, less forgiving to mistake and reliance on tactics vs stats.

The second is more of nuisance, lowering the rate of exp gain for players above monster level. This allow low-level or poorly equipped player to play with slower gain of exp("The Grind") or to farm items safely. This is suited for casual/softcore gameplay where gameplay expirience is predictable and stat-based (monsters have lower stats).