But many transit systems use larger buses to increase passenger capacity.

Most city streets are intended only for local traffic, and it's often inconvenient to use local streets for longer trips. Which means buses usually drive on major streets, which may become congested during peak hours. Due to fixed overheads, large buses use less road space per passenger and less stop time per passenger getting on/off.

It's also common that there is not enough space for a bus to pass a stopped bus due to congestion. Which means buses may have to stop at every stop on the route, even if no passenger is getting on/off.

> But many transit systems use larger buses to increase passenger capacity

Non sequitur.

You said busses are constrained by congestion. That's simply not true. When congestion is reduced, due to demographics or a congestion charge, cities don't run out to buy more busses. If the release of a suspected constraint doesn't cause an increase in signal, it isn't a constraint.

The real constraints on buses are demand, capital budgets and operating budgets. The dominant component of the last is the driver. The dominating deterimant of the first is the route. If you can have more buses on more routes for the same capital and operating cost as fewer, big buses, you'll increae ridership.

> If you can have more buses on more routes for the same capital and operating cost as fewer, big buses, you'll increae ridership.

The problem is, you probably only have a limited number of suitable arteries, so those routes are going to have places where they overlap. There are bus stops near me which at peak times have multiple buses per minute arriving, on many different routes, and at peak times these sometimes pile up and have to wait to load and unload. That's with big hundred-person double-deckers; it would be far worse if they were smaller.

I said that the dominant constraint is road capacity. Which means that buses must be large enough to carry the required number of passengers on the streets that exist. When you have buses running on ordinary streets with dedicated bus lanes (but no bus rapid transit), peak capacity is around 120 vehicles/hour/lane. Even mid-sized cities can have bottlenecks where that limit is reached due to geographic constraints.