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The interplay between congestion and crowding externalities in the design of urban bus systems is identified and analysed. A multimodal social welfare maximisation model with spatially disaggregated demand is developed, in which users choose between travelling by bus, car or walking in a transport corridor. Optimisation variables are bus fare, congestion toll, bus frequency, bus size, fare collection system, bus boarding policy and the number of seats inside buses. We find that optimal bus frequency results from a trade-off between the level of congestion inside buses, i.e., passengers’ crowding, and the level of congestion outside buses, i.e., the effect of frequency on slowing down both buses and cars in mixed-traffic roads. A numerical application shows that optimal frequency is quite sensitive to the assumptions on crowding costs, impact of buses on traffic congestion, and overall congestion level. If crowding …