However, this is not how many people seem to use the term.

Most people on this group hierarchy who say "character development" really seem to mean "characterization". When I hear "That episode had really good characterization", I take it to mean, "That episode made really good use of aspects of the characters which have been used in the past. They really made a lot of sense in that plot and the attention paid to the details of the characters' personalities made it a better episode."

This is very different from character development in that the personalities of the people on the show do not actually change.

Another common - and IMO inaccurate - use of "character development" is to use it to mean what I call "character delineation" (or "character definement"). If someone says, "That episode had some interesting character delineation in it", I would interpret that as, "We learned some new things about the characters in that episode. What we learned was already a part of their characterization, but hadn't had the opportunity to come out in previous episodes. The new ideas were interesting, and were consistent with what we did know about the characters."

This is different from "character development" in that the characters do not actually change as a result of the episode, but we learn something new about them which we simply hadn't known before. A new character is always introduced with some delineation. If some of the delineated elements are later altered (due to some experience in the show), this would be character development.

One could (in some cases) term "characterization" as either "good" or "bad" on an objective level, depending on whether a character behaves in a manner consistent with his previous appearances. One could not reasonably call character delineation or development "good" or "bad" objectively; that depends entirely on whether the viewer happens to like the revelation or change (respectively). I.e., the judgment must be subjective in all cases.

EXAMPLES:

1. Good characterization might have Picard choosing to sacrifice himself to uphold the principles he believes in (as he nearly did in "Who Watches The Watchers"). He showed himself capable of such actions in episodes such as "Where Silence Has Lease". I leave bad characterization as an exercise for the reader. :-)
2. An example of character delineation might be the introduction of Picard's interest in archaeology (which I think didn't occur until the second season's "Contagion"). It's not inconsistent which what had gone before, but hadn't really appeared before either. More importantly, it's not really a change of a character aspect of Picard, but an introduction of an entirely new one.
3. An example of character development would be (if you read the episode this way) Data choosing to kill Fajo in order to escape his clutches in "The Most Toys". Until then, Data had shown the utmost respect for all life, but, in this new situation, he decides that his freedom is worth Fajo's life. (There is some ambiguity as to whether that is change what happened, of course.)