Radiosity is a global illumination algorithm that calculates diffuse light reflection between surfaces in a scene. It divides each surface into small patches and calculates the amount of light entering and leaving each patch based on light contributions from all other patches. This results in realistic, soft shadows. Radiosity is commonly used to render interior scenes composed of diffusely reflecting surfaces, but has limitations as it does not account for specular reflections. It works best in combination with ray tracing.