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In modern society, mobility is an integral part of life. Due to a high population growth, in most of the urban areas in Indonesia, congestion and transportation have become a major problem. For that reason, in the last 6 years the Indonesian Government has been concerned with developing a bus rapid transit (BRT) system as a major mass transportation mode. In the case of the Special Region of Yogyakarta Province, the government subsidizes bus operations because of the “service function” of public transportation. This research employs the Parry and Small (2009) models which developed analytical model of urban passenger travel, in which transit user costs depend on congestion, transit frequency, route density, and vehicle crowding, to calculate the optimal public transportation subsidy level. In comparison to other subsidy calculation models the Parry and Small models have some advantages because they take private vehicles and externalities, such as congestion, into account and accomodate the detailed information of private vehicles. Currently, the average bus occupancy in the peak period is 21 and in the off-peak period is 16 and the government provides subsidies of 46 percent for the peak period operating costs and 39 percent of the off-peak period operating costs. At those subsidy levels, each passenger has to pay bus-fare of Rp 158.37 per kilometer. Meanwhile, in the peak period, optimal subsidy is 14 percent, and in the off-peak period is 45 percent. As a result, the passenger fare will be Rp 53.94/pass-km, which is approximately 1.6 times of the current fare that leads 21.3 percent demand reduction. On the other hand, in the off-peak period, by increasing subsidies to 45 percent, the passenger fare will decrease to be Rp 142.26/pass-km that generates 8.2 percent higher demand.

Kata Kunci : Public transport, subsidy, welfare.